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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 February 2, 2013, the Company operated 550 stores in 45 states. All amounts are stated in thousands, with the exception of per share amounts and number of stores.
The Company has determined its operating segments on the same basis that it uses to internally evaluate performance. The Company has combined its three operating segments: retail stores, salon services and e-commerce, into one reportable segment because they have a similar class of consumer, economic characteristics, nature of products and distribution methods.
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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 February 2, 2013 (fiscal 2012), January 28, 2012 (fiscal 2011) and January 29, 2011 (fiscal 2010) were 53, 52 and 52 week years, respectively.
Use of estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the accounting period. Actual results could differ from those estimates.
Cash and cash equivalents
Cash and cash equivalents include cash on hand and highly liquid investments with maturities of three months or less from the date of purchase. Cash equivalents include amounts due from third-party credit card receivables because such amounts generally convert to cash within one to three days with little or no default risk.
Receivables
Receivables consist principally of amounts receivable from vendors related to allowances earned but not yet received. These receivables are computed based on provisions of the vendor agreements in place and the Company’s completed performance. The Company’s vendors are primarily U.S.-based producers of consumer products. The Company does not require collateral on its receivables and does not accrue interest. Credit risk with respect to receivables is limited due to the diversity of vendors comprising the Company’s vendor base. The Company performs ongoing credit evaluations of its vendors and evaluates the collectability of its receivables based on the length of time the receivable is past due and historical experience. The allowance for receivables totaled $973 and $556 as of February 2, 2013 and January 28, 2012, 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 February 2, 2013 and January 28, 2012.
Property and equipment
The Company’s property and equipment are stated at cost net of accumulated depreciation and amortization. Maintenance and repairs are charged to operating expense as incurred. The Company’s assets are depreciated or amortized using the straight-line method, over the shorter of their estimated useful lives or the expected lease term as follows:
Equipment and fixtures |
3 to 10 years | |||
Leasehold improvements |
10 years | |||
Electronic equipment and software |
3 to 5 years |
The Company capitalizes costs incurred during the application development stage in developing or obtaining internal use software. These costs are amortized over the estimated useful life of the software.
The Company periodically evaluates whether changes have occurred that would require revision of the remaining useful life of equipment and leasehold improvements or render them not recoverable. If such circumstances arise, the Company uses an estimate of the undiscounted sum of expected future operating cash flows during their holding period to determine whether the long-lived assets are impaired. If the aggregate undiscounted cash flows are less than the carrying amount of the assets, the resulting impairment charges to be recorded are calculated based on the excess of the carrying value of the assets over the fair value of such assets, with the fair value determined based on an estimate of discounted future cash flows.
Customer loyalty program
The Company currently operates two loyalty programs, ULTAmate Rewards and The Club at Ulta. The Club at Ulta is a certificate program offering customers reward certificates for free beauty products based on their level of purchases. Customers earn reward certificates to redeem during specific promotional periods throughout the year. ULTAmate Rewards is a points-based program in which customers earn points based on their purchases. Points earned are valid for one year and may be redeemed on any product or select salon service. The Company accrues the cost of anticipated redemptions related to these programs at the time of the initial purchase based on historical experience. The accrued liability related to both of the loyalty programs at February 2, 2013 and January 28, 2012 was $7,084 and $6,207, respectively. The cost of these programs, which was $22,044, $17,200 and $12,942 in fiscal 2012, 2011 and 2010, respectively, is included in cost of sales in the statements of income.
Deferred rent
Many of the Company’s operating leases contain predetermined fixed increases of the minimum rental rate during the lease. For these leases, the Company recognizes the related rental expense on a straight-line basis over the expected lease term, including cancelable option periods where failure to exercise such options would result in an economic penalty, and records the difference between the amounts charged to expense and the rent paid as deferred rent. The lease term commences on the earlier of the date when the Company becomes legally obligated for rent payments or the date the Company takes possession of the leased space.
As part of many lease agreements, the Company receives construction allowances from landlords for tenant improvements. These leasehold improvements made by the Company are capitalized and amortized over the shorter of their estimated useful lives or the lease term. The construction allowances are recorded as deferred rent and amortized on a straight-line basis over the lease term as a reduction of rent expense.
Revenue recognition
Net sales include merchandise sales and salon service revenue. Revenue from merchandise sales at stores is recognized at the time of sale, net of estimated returns. The Company provides refunds for product returns within 60 days from the original purchase date. Salon revenue is recognized when services are rendered. Salon service revenue amounted to $121,357, $98,479 and $86,484 for fiscal 2012, 2011 and 2010, respectively. Company coupons and other incentives are recorded as a reduction of net sales. State sales taxes are presented on a net basis as the Company considers itself a pass-through conduit for collecting and remitting state sales tax. E-commerce sales are recorded at the time of shipment.
The Company’s gift card sales are deferred and recognized in net sales when the gift card is redeemed for product or services. The Company’s gift cards do not expire and do not include service fees that decrease customer balances. The Company has maintained Company-specific, historical data related to its large pool of similar gift card transactions sold and redeemed over a significant time frame. During fiscal 2010, there was a change in facts and circumstances which resulted in the Company recognizing approximately $2.0 million of gift card breakage income which related primarily to gift cards sold in prior years. The Company recognizes gift card breakage to the extent there is no requirement for remitting balances to governmental agencies under unclaimed property laws. Gift card breakage is recognized over the same performance period, and in the same proportion, that the Company’s data has demonstrated that gift cards are redeemed. Gift card breakage is recorded as a decrease in selling, general and administrative expense in the statements of income. Deferred gift card revenue was $13,364 and $10,573 at February 2, 2013 and January 28, 2012, respectively, and is included in accrued liabilities – accrued customer liabilities (Note 5).
Vendor allowances
The Company receives allowances from vendors in the normal course of business including advertising and markdown allowances, purchase volume discounts and rebates, and reimbursement for defective merchandise, and certain selling and display expenses. Substantially all vendor allowances are recorded as a reduction of the vendor’s product cost and are recognized in cost of sales as the product is sold.
Advertising
Advertising expense consists principally of paper, print, and distribution costs related to the Company’s advertising circulars. The Company expenses the production and distribution costs related to its advertising circulars in the period the related promotional event occurs. Total advertising costs, exclusive of incentives from vendors and start-up advertising expense, amounted to $118,365, $99,446 and $84,796 for fiscal 2012, 2011 and 2010, respectively. Prepaid advertising costs included in prepaid expenses and other current assets were $6,251and $4,721 as of February 2, 2013 and January 28, 2012, respectively.
Pre-opening expenses
Non-capital expenditures incurred prior to the grand opening of a new, remodeled or relocated store are charged against earnings as incurred.
Cost of sales
Cost of sales includes the cost of merchandise sold including all vendor allowances, which are treated as a reduction of merchandise costs; warehousing and distribution costs including labor and related benefits, freight, rent, depreciation and amortization, real estate taxes, utilities, and insurance; shipping and handling costs; store occupancy costs including rent, depreciation and amortization, real estate taxes, utilities, repairs and maintenance, insurance, licenses, and cleaning expenses; salon payroll and benefits; customer loyalty program expense; and shrink and inventory valuation reserves.
Selling, general and administrative expenses
Selling, general and administrative expenses includes payroll, bonus, and benefit costs for retail and corporate employees; advertising and marketing costs; occupancy costs related to our corporate office facilities; public company expense including Sarbanes-Oxley compliance expenses; stock-based compensation expense; depreciation and amortization for all assets except those related to our retail and warehouse operations which are included in cost of sales; and legal, finance, information systems and other corporate overhead costs.
Income taxes
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities used for financial reporting purposes and the amounts used for income tax purposes and the amounts reported were derived using the enacted tax rates in effect for the year the differences are expected to reverse.
Income tax benefits related to uncertain tax positions are recognized only when it is more likely than not that the tax position will be sustained on examination by the taxing authorities. The determination is based on the technical merits of the position and presumes that each uncertain tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information. Penalties and interest related to unrecognized tax positions are recorded in income tax expense.
Share-based compensation
The Company accounts for share-based compensation in accordance with the Accounting Standards CodificationTM (ASC) rules for stock compensation. Share-based compensation cost is measured at grant date, based on the fair value of the award, and is recognized on a straight-line method over the requisite service period for awards expected to vest. The Company recorded stock compensation expense of $13,375, $11,605 and $11,155 for fiscal 2012, 2011 and 2010, respectively (see Note 9, “Share-based awards”).
Insurance expense
The Company has insurance programs with third party insurers for employee health, workers compensation and general liability, among others, to limit the Company’s liability exposure. The insurance programs are premium based and include retentions, deductibles and stop loss coverage. Current stop loss coverage is $150 for employee health claims, $100 for general liability claims and $250 for workers compensation claims. The Company makes collateral and premium payments during the plan year and accrues expenses in the event additional premium is due from the Company based on actual claim results.
Net income per common share
Basic net income per common share is computed by dividing income available to common stockholders by the weighted-average number of shares of common stock outstanding during the period. Diluted net income per share includes dilutive common stock equivalents, using the treasury stock method (see Note 10, “Net income per common share”).
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3. Property and equipment
Property and equipment consist of the following:
February 2, 2013 |
January 28, 2012 |
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Equipment and fixtures |
$ | 323,069 | $ | 256,479 | ||||
Leasehold improvements |
307,624 | 256,487 | ||||||
Electronic equipment and software |
169,997 | 126,790 | ||||||
Construction-in-progress |
37,700 | 33,598 | ||||||
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838,390 | 673,354 | |||||||
Less accumulated depreciation and amortization |
(355,331 | ) | (296,369 | ) | ||||
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Property and equipment, net |
$ | 483,059 | $ | 376,985 | ||||
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The Company had no capitalized interest for fiscal 2012 and 2011 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 2012, 2011 and 2010. Total rent expense under operating leases was $115,755, $94,175 and $82,365 for fiscal 2012, 2011 and 2010, respectively. Future minimum lease payments under operating leases as of February 2, 2013, are as follows:
Fiscal year |
Operating Leases |
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2013 |
$ | 155,542 | ||
2014 |
160,168 | |||
2015 |
153,441 | |||
2016 |
144,991 | |||
2017 |
133,574 | |||
2018 and thereafter |
460,811 | |||
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Total minimum lease payments |
$ | 1,208,527 | ||
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Included in the operating lease schedule above is $210,375 of minimum lease payments for stores that will open in fiscal 2013.
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 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:
February 2, 2013 |
January 28, 2012 |
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Accrued vendor liabilities (including accrued property and equipment costs) |
$ | 17,254 | $ | 10,868 | ||||
Accrued customer liabilities |
21,638 | 17,978 | ||||||
Accrued payroll, bonus and employee benefits |
30,418 | 24,449 | ||||||
Accrued taxes, other |
9,991 | 7,619 | ||||||
Other accrued liabilities |
12,826 | 13,497 | ||||||
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Accrued liabilities |
$ | 92,127 | $ | 74,411 | ||||
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6. Income taxes
The provision for income taxes consists of the following:
Fiscal 2012 |
Fiscal 2011 |
Fiscal 2010 |
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Current: |
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Federal |
$ | 83,606 | $ | 53,495 | $ | 32,288 | ||||||
State |
14,832 | 11,022 | 7,070 | |||||||||
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Total current |
98,438 | 64,517 | 39,358 | |||||||||
Deferred: |
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Federal |
8,950 | 10,796 | 8,076 | |||||||||
State |
(144 | ) | 31 | (335 | ) | |||||||
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Total deferred |
8,806 | 10,827 | 7,741 | |||||||||
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Provision for income taxes |
$ | 107,244 | $ | 75,344 | $ | 47,099 | ||||||
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A reconciliation of the federal statutory rate to the Company’s effective tax rate is as follows:
Fiscal 2012 |
Fiscal 2011 |
Fiscal 2010 |
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Federal statutory rate |
35.0 | % | 35.0 | % | 35.0 | % | ||||||
State effective rate, net of federal tax benefit |
3.4 | % | 3.7 | % | 3.7 | % | ||||||
Other |
(0.1 | %) | (0.2 | %) | 1.2 | % | ||||||
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Effective tax rate |
38.3 | % | 38.5 | % | 39.9 | % | ||||||
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Significant components of the Company’s deferred tax assets and liabilities are as follows:
February 2, 2013 |
January 28, 2012 |
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Deferred tax assets: |
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Reserves not currently deductible |
$ | 18,160 | $ | 13,207 | ||||
Employee benefits |
5,029 | 4,970 | ||||||
Net operating loss & credit carryforwards |
208 | 179 | ||||||
Accrued liabilities |
3,854 | 3,499 | ||||||
Inventory valuation |
1,280 | 1,570 | ||||||
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Total deferred tax assets |
28,531 | 23,425 | ||||||
Deferred tax liabilities: |
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Property and equipment |
39,357 | 32,414 | ||||||
Deferred rent obligation |
21,638 | 16,572 | ||||||
Prepaid expenses |
8,140 | 6,370 | ||||||
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Total deferred tax liabilities |
69,135 | 55,356 | ||||||
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Net deferred tax liability |
$ | (40,604 | ) | $ | (31,931 | ) | ||
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At February 2, 2013, the Company had net operating loss carryforwards (NOLs) for federal income tax purposes of approximately $73, which expire between 2013 and 2014. Based on Internal Revenue Code Section 382 relating to changes in ownership of the Company, utilization of the federal NOLs is subject to an annual limitation of $440 for federal NOLs created prior to April 1, 1997. At February 2, 2013, the Company had $281 credit carryforwards for state income tax purposes.
The Company accounts for uncertainty in income taxes in accordance with the ASC rules for income taxes. Based on the Company’s best estimate of the potential liability for uncertain tax positions there was no reserve at February 2, 2013 and January 28, 2012.
The Company acknowledges that the amount of unrecognized tax benefits may change in the next twelve months. However, it does not expect the change to have a significant impact on its financial statements. Income tax-related interest and penalties were insignificant for fiscal 2012, 2011 and 2010.
The Company files tax returns in the U.S. Federal and State jurisdictions. The Company is no longer subject to U.S. Federal examinations by the Internal Revenue Services for the years before 2010 and, this applies to examinations by the State authorities before 2008.
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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 lenders. The Loan Agreement extends the maturity of the Company’s credit facility to October 2016, provides maximum revolving loans equal to the lesser of $200,000 or a percentage of eligible owned inventory, contains a $10,000 subfacility for letters of credit and allows the Company to increase the revolving facility by an additional $50,000, subject to consent by each lender and other conditions. The Loan Agreement contains a requirement to maintain a minimum amount of excess borrowing availability at all times. Substantially all of the Company’s assets are pledged as collateral for outstanding borrowings under the facility. Outstanding borrowings will bear interest at the prime rate or Libor plus 1.50% and the unused line fee is 0.225%. As of February 2, 2013 and January 28, 2012, the Company had no borrowings outstanding under the credit facility and the Company was in compliance with all terms and covenants of the agreement.
On September 5, 2012, the Company entered into Amendment No. 1 to the Amended and Restated Loan and Security Agreement (the Amendment) with the lender group. The 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.
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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.
On February 3, 2008, the Company adopted the ASC rules for fair value measurements and disclosures. The adoption had no impact on the Company’s financial statements. The new rules established a three-tier hierarchy for fair value measurements, which prioritizes the inputs used in measuring fair value as follows:
a. Level 1 — observable inputs such as quoted prices for identical instruments in active markets.
b. Level 2 — inputs other than quoted prices in active markets that are observable either directly or indirectly through corroboration with observable market data.
c. Level 3 — unobservable inputs in which there is little or no market data, which would require the Company to develop its own assumptions.
As of February 2, 2013, the Company held financial liabilities of $2,876 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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11. 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 2012, 2011 and 2010, the Company match was 100% of the first 3.0%, 2.5% and 2%, respectively, of eligible compensation. For fiscal years 2012, 2011 and 2010, the Company match was $3,040, $2,146 and $1,106, respectively.
On January 1, 2009, the Company established a non-qualified deferred compensation plan for highly compensated employees whose contributions are limited under qualified defined contribution plans. Amounts contributed and deferred under the plan are credited or charged with the performance of investment options offered under the plan as elected by the participants. In the event of bankruptcy, the assets of this plan are available to satisfy the claims of general creditors. The liability for compensation deferred under the Company’s plan included in other long-term liabilities was $2,876 as of February 2, 2013. 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 $2,866 as of February 2, 2013. As of January 28, 2012 the liability for compensation deferred under the Company’s plan included in accrued liabilities was $1,855 and the corresponding asset included in prepaid expenses and other current assets was $1,968. The change in presentation of the asset and liability from current to noncurrent in fiscal 2012 is immaterial to the balance sheets ending February 2, 2013 and January 28, 2012. Total expense recorded under this plan is included in selling, general and administrative expenses and was insignificant during fiscal 2012 and 2011.
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12. 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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Fiscal 2012 |
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Allowance for doubtful accounts |
$ | 556 | $ | 419 | $ | (2 | )(a) | $ | 973 | |||||||
Shrink reserve |
2,445 | 8,077 | (6,502 | ) | 4,020 | |||||||||||
Inventory — lower of cost or market reserve |
2,070 | 1,099 | (805 | ) | 2,364 | |||||||||||
Insurance: |
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Workers Comp / General Liability Prepaid Asset |
(2,084 | )(b) | 4,864 | (5,180 | ) | (2,400 | ) | |||||||||
Employee Health Care Accrued Liability |
1,929 | 26,584 | (26,281 | ) | 2,232 | |||||||||||
Fiscal 2011 |
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Allowance for doubtful accounts |
$ | 257 | $ | 607 | $ | (308 | )(a) | $ | 556 | |||||||
Shrink reserve |
2,300 | 5,535 | (5,390 | ) | 2,445 | |||||||||||
Inventory — lower of cost or market reserve |
3,316 | 870 | (2,116 | ) | 2,070 | |||||||||||
Insurance: |
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Workers Comp / General Liability Prepaid Asset |
(970 | )(b) | 4,495 | (5,609 | ) | (2,084 | ) | |||||||||
Employee Health Care Accrued Liability |
1,608 | 21,036 | (20,715 | ) | 1,929 | |||||||||||
Fiscal 2010 |
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Allowance for doubtful accounts |
$ | 489 | $ | 189 | $ | (421 | )(a) | $ | 257 | |||||||
Shrink reserve |
1,869 | 5,191 | (4,760 | ) | 2,300 | |||||||||||
Inventory — lower of cost or market reserve |
4,014 | 881 | (1,579 | ) | 3,316 | |||||||||||
Insurance: |
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Workers Comp / General Liability Prepaid Asset |
(1,181 | )(b) | 4,320 | (4,109 | ) | (970 | ) | |||||||||
Employee Health Care Accrued Liability |
1,579 | 17,601 | (17,572 | ) | 1,608 |
(a) | Represents write-off of uncollectible accounts. |
(b) | Represents prepaid insurance |
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13. 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 2012 and fiscal 2011. The Company uses a 13 week (14 week in fourth quarter fiscal 2012) fiscal quarter ending on the last Saturday of the quarter.
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First | Second | Third | Fourth | First | Second | Third | Fourth | |||||||||||||||||||||||||
Net sales |
$ | 474,098 | $ | 481,683 | $ | 505,640 | $ | 758,835 | $ | 386,006 | $ | 394,567 | $ | 413,067 | $ | 582,511 | ||||||||||||||||
Cost of sales |
303,186 | 314,058 | 320,147 | 499,191 | 251,101 | 260,280 | 263,884 | 384,046 | ||||||||||||||||||||||||
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Gross profit |
170,912 | 167,625 | 185,493 | 259,644 | 134,905 | 134,287 | 149,183 | 198,465 | ||||||||||||||||||||||||
Selling, general and administrative expenses |
110,943 | 106,040 | 117,934 | 153,963 | 94,615 | 90,811 | 100,997 | 124,235 | ||||||||||||||||||||||||
Pre-opening expenses |
2,523 | 4,126 | 6,252 | 1,915 | 1,230 | 3,816 | 3,958 | 983 | ||||||||||||||||||||||||
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Operating income |
57,446 | 57,459 | 61,307 | 103,766 | 39,060 | 39,660 | 44,228 | 73,247 | ||||||||||||||||||||||||
Interest expense |
21 | 104 | 39 | 21 | 173 | 147 | 176 | 91 | ||||||||||||||||||||||||
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Income before income taxes |
57,425 | 57,355 | 61,268 | 103,745 | 38,887 | 39,513 | 44,052 | 73,156 | ||||||||||||||||||||||||
Income tax expense |
22,557 | 22,357 | 23,117 | 39,213 | 15,591 | 15,608 | 17,284 | 26,861 | ||||||||||||||||||||||||
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Net income |
$ | 34,868 | $ | 34,998 | $ | 38,151 | $ | 64,532 | $ | 23,296 | $ | 23,905 | $ | 26,768 | $ | 46,295 | ||||||||||||||||
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Net income per common share: |
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Basic |
$ | 0.56 | 0.55 | 0.60 | $ | 1.01 | $ | 0.38 | $ | 0.39 | $ | 0.44 | $ | 0.75 | ||||||||||||||||||
Diluted |
$ | 0.54 | 0.54 | 0.59 | $ | 1.00 | $ | 0.37 | $ | 0.38 | $ | 0.42 | $ | 0.73 |
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.
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14. Subsequent event
On February 14, 2013, we announced the resignation of Carl S. Rubin as President, Chief Executive Officer and Director and the appointment of Dennis K. Eck as our Interim Chief Executive Officer until a permanent replacement is identified.
On March 12, 2013, we announced the permanent appointment of Scott M. Settersten as Chief Financial Officer and Assistant Secretary of the Company. Mr. Settersten previously served as Acting Chief Financial Officer and Assistant Secretary since October 18, 2012.
On March 18, 2013, we announced that our Board of Directors had authorized a stock repurchase program pursuant to which the Company may repurchase up to $150 million of the Company’s common stock. The repurchases may be made from time to time in the open market, in privately negotiated transactions, or otherwise, at prices that the Company deems appropriate and subject to market conditions, applicable law and other factors deemed relevant in the Company’s sole discretion.
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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 February 2, 2013 (fiscal 2012), January 28, 2012 (fiscal 2011) and January 29, 2011 (fiscal 2010) were 53, 52 and 52 week years, respectively.
Use of estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the accounting period. Actual results could differ from those estimates.
Cash and cash equivalents
Cash and cash equivalents include cash on hand and highly liquid investments with maturities of three months or less from the date of purchase. Cash equivalents include amounts due from third-party credit card receivables because such amounts generally convert to cash within one to three days with little or no default risk.
Receivables
Receivables consist principally of amounts receivable from vendors related to allowances earned but not yet received. These receivables are computed based on provisions of the vendor agreements in place and the Company’s completed performance. The Company’s vendors are primarily U.S.-based producers of consumer products. The Company does not require collateral on its receivables and does not accrue interest. Credit risk with respect to receivables is limited due to the diversity of vendors comprising the Company’s vendor base. The Company performs ongoing credit evaluations of its vendors and evaluates the collectability of its receivables based on the length of time the receivable is past due and historical experience. The allowance for receivables totaled $973 and $556 as of February 2, 2013 and January 28, 2012, 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 February 2, 2013 and January 28, 2012.
Property and equipment
The Company’s property and equipment are stated at cost net of accumulated depreciation and amortization. Maintenance and repairs are charged to operating expense as incurred. The Company’s assets are depreciated or amortized using the straight-line method, over the shorter of their estimated useful lives or the expected lease term as follows:
Equipment and fixtures |
3 to 10 years | |||
Leasehold improvements |
10 years | |||
Electronic equipment and software |
3 to 5 years |
The Company capitalizes costs incurred during the application development stage in developing or obtaining internal use software. These costs are amortized over the estimated useful life of the software.
The Company periodically evaluates whether changes have occurred that would require revision of the remaining useful life of equipment and leasehold improvements or render them not recoverable. If such circumstances arise, the Company uses an estimate of the undiscounted sum of expected future operating cash flows during their holding period to determine whether the long-lived assets are impaired. If the aggregate undiscounted cash flows are less than the carrying amount of the assets, the resulting impairment charges to be recorded are calculated based on the excess of the carrying value of the assets over the fair value of such assets, with the fair value determined based on an estimate of discounted future cash flows.
Customer loyalty program
The Company currently operates two loyalty programs, ULTAmate Rewards and The Club at Ulta. The Club at Ulta is a certificate program offering customers reward certificates for free beauty products based on their level of purchases. Customers earn reward certificates to redeem during specific promotional periods throughout the year. ULTAmate Rewards is a points-based program in which customers earn points based on their purchases. Points earned are valid for one year and may be redeemed on any product or select salon service. The Company accrues the cost of anticipated redemptions related to these programs at the time of the initial purchase based on historical experience. The accrued liability related to both of the loyalty programs at February 2, 2013 and January 28, 2012 was $7,084 and $6,207, respectively. The cost of these programs, which was $22,044, $17,200 and $12,942 in fiscal 2012, 2011 and 2010, respectively, is included in cost of sales in the statements of income.
Deferred rent
Many of the Company’s operating leases contain predetermined fixed increases of the minimum rental rate during the lease. For these leases, the Company recognizes the related rental expense on a straight-line basis over the expected lease term, including cancelable option periods where failure to exercise such options would result in an economic penalty, and records the difference between the amounts charged to expense and the rent paid as deferred rent. The lease term commences on the earlier of the date when the Company becomes legally obligated for rent payments or the date the Company takes possession of the leased space.
As part of many lease agreements, the Company receives construction allowances from landlords for tenant improvements. These leasehold improvements made by the Company are capitalized and amortized over the shorter of their estimated useful lives or the lease term. The construction allowances are recorded as deferred rent and amortized on a straight-line basis over the lease term as a reduction of rent expense.
Revenue recognition
Net sales include merchandise sales and salon service revenue. Revenue from merchandise sales at stores is recognized at the time of sale, net of estimated returns. The Company provides refunds for product returns within 60 days from the original purchase date. Salon revenue is recognized when services are rendered. Salon service revenue amounted to $121,357, $98,479 and $86,484 for fiscal 2012, 2011 and 2010, respectively. Company coupons and other incentives are recorded as a reduction of net sales. State sales taxes are presented on a net basis as the Company considers itself a pass-through conduit for collecting and remitting state sales tax. E-commerce sales are recorded at the time of shipment.
The Company’s gift card sales are deferred and recognized in net sales when the gift card is redeemed for product or services. The Company’s gift cards do not expire and do not include service fees that decrease customer balances. The Company has maintained Company-specific, historical data related to its large pool of similar gift card transactions sold and redeemed over a significant time frame. During fiscal 2010, there was a change in facts and circumstances which resulted in the Company recognizing approximately $2.0 million of gift card breakage income which related primarily to gift cards sold in prior years. The Company recognizes gift card breakage to the extent there is no requirement for remitting balances to governmental agencies under unclaimed property laws. Gift card breakage is recognized over the same performance period, and in the same proportion, that the Company’s data has demonstrated that gift cards are redeemed. Gift card breakage is recorded as a decrease in selling, general and administrative expense in the statements of income. Deferred gift card revenue was $13,364 and $10,573 at February 2, 2013 and January 28, 2012, respectively, and is included in accrued liabilities – accrued customer liabilities (Note 5).
Vendor allowances
The Company receives allowances from vendors in the normal course of business including advertising and markdown allowances, purchase volume discounts and rebates, and reimbursement for defective merchandise, and certain selling and display expenses. Substantially all vendor allowances are recorded as a reduction of the vendor’s product cost and are recognized in cost of sales as the product is sold.
Advertising
Advertising expense consists principally of paper, print, and distribution costs related to the Company’s advertising circulars. The Company expenses the production and distribution costs related to its advertising circulars in the period the related promotional event occurs. Total advertising costs, exclusive of incentives from vendors and start-up advertising expense, amounted to $118,365, $99,446 and $84,796 for fiscal 2012, 2011 and 2010, respectively. Prepaid advertising costs included in prepaid expenses and other current assets were $6,251and $4,721 as of February 2, 2013 and January 28, 2012, respectively
Pre-opening expenses
Non-capital expenditures incurred prior to the grand opening of a new, remodeled or relocated store are charged against earnings as incurred.
Cost of sales
Cost of sales includes the cost of merchandise sold including all vendor allowances, which are treated as a reduction of merchandise costs; warehousing and distribution costs including labor and related benefits, freight, rent, depreciation and amortization, real estate taxes, utilities, and insurance; shipping and handling costs; store occupancy costs including rent, depreciation and amortization, real estate taxes, utilities, repairs and maintenance, insurance, licenses, and cleaning expenses; salon payroll and benefits; customer loyalty program expense; and shrink and inventory valuation reserves.
Selling, general and administrative expenses
Selling, general and administrative expenses includes payroll, bonus, and benefit costs for retail and corporate employees; advertising and marketing costs; occupancy costs related to our corporate office facilities; public company expense including Sarbanes-Oxley compliance expenses; stock-based compensation expense; depreciation and amortization for all assets except those related to our retail and warehouse operations which are included in cost of sales; and legal, finance, information systems and other corporate overhead costs.
Income taxes
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities used for financial reporting purposes and the amounts used for income tax purposes and the amounts reported were derived using the enacted tax rates in effect for the year the differences are expected to reverse.
Income tax benefits related to uncertain tax positions are recognized only when it is more likely than not that the tax position will be sustained on examination by the taxing authorities. The determination is based on the technical merits of the position and presumes that each uncertain tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information. Penalties and interest related to unrecognized tax positions are recorded in income tax expense.
Share-based compensation
The Company accounts for share-based compensation in accordance with the Accounting Standards CodificationTM (ASC) rules for stock compensation. Share-based compensation cost is measured at grant date, based on the fair value of the award, and is recognized on a straight-line method over the requisite service period for awards expected to vest. The Company recorded stock compensation expense of $13,375, $11,605 and $11,155 for fiscal 2012, 2011 and 2010, respectively (see Note 9, “Share-based awards”).
Insurance expense
The Company has insurance programs with third party insurers for employee health, workers compensation and general liability, among others, to limit the Company’s liability exposure. The insurance programs are premium based and include retentions, deductibles and stop loss coverage. Current stop loss coverage is $150 for employee health claims, $100 for general liability claims and $250 for workers compensation claims. The Company makes collateral and premium payments during the plan year and accrues expenses in the event additional premium is due from the Company based on actual claim results.
Net income per common share
Basic net income per common share is computed by dividing income available to common stockholders by the weighted-average number of shares of common stock outstanding during the period. Diluted net income per share includes dilutive common stock equivalents, using the treasury stock method (see Note 10, “Net income per common share”).
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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 |
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Property and equipment consist of the following:
February 2, 2013 |
January 28, 2012 |
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Equipment and fixtures |
$ | 323,069 | $ | 256,479 | ||||
Leasehold improvements |
307,624 | 256,487 | ||||||
Electronic equipment and software |
169,997 | 126,790 | ||||||
Construction-in-progress |
37,700 | 33,598 | ||||||
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838,390 | 673,354 | |||||||
Less accumulated depreciation and amortization |
(355,331 | ) | (296,369 | ) | ||||
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Property and equipment, net |
$ | 483,059 | $ | 376,985 | ||||
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Future minimum lease payments under operating leases as of February 2, 2013, are as follows:
Fiscal year |
Operating Leases |
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2013 |
$ | 155,542 | ||
2014 |
160,168 | |||
2015 |
153,441 | |||
2016 |
144,991 | |||
2017 |
133,574 | |||
2018 and thereafter |
460,811 | |||
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Total minimum lease payments |
$ | 1,208,527 | ||
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Accrued liabilities consist of the following:
February 2, 2013 |
January 28, 2012 |
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Accrued vendor liabilities (including accrued property and equipment costs) |
$ | 17,254 | $ | 10,868 | ||||
Accrued customer liabilities |
21,638 | 17,978 | ||||||
Accrued payroll, bonus and employee benefits |
30,418 | 24,449 | ||||||
Accrued taxes, other |
9,991 | 7,619 | ||||||
Other accrued liabilities |
12,826 | 13,497 | ||||||
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Accrued liabilities |
$ | 92,127 | $ | 74,411 | ||||
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The provision for income taxes consists of the following:
Fiscal 2012 |
Fiscal 2011 |
Fiscal 2010 |
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Current: |
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Federal |
$ | 83,606 | $ | 53,495 | $ | 32,288 | ||||||
State |
14,832 | 11,022 | 7,070 | |||||||||
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Total current |
98,438 | 64,517 | 39,358 | |||||||||
Deferred: |
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Federal |
8,950 | 10,796 | 8,076 | |||||||||
State |
(144 | ) | 31 | (335 | ) | |||||||
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Total deferred |
8,806 | 10,827 | 7,741 | |||||||||
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Provision for income taxes |
$ | 107,244 | $ | 75,344 | $ | 47,099 | ||||||
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A reconciliation of the federal statutory rate to the Company’s effective tax rate is as follows:
Fiscal 2012 |
Fiscal 2011 |
Fiscal 2010 |
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Federal statutory rate |
35.0 | % | 35.0 | % | 35.0 | % | ||||||
State effective rate, net of federal tax benefit |
3.4 | % | 3.7 | % | 3.7 | % | ||||||
Other |
(0.1 | %) | (0.2 | %) | 1.2 | % | ||||||
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Effective tax rate |
38.3 | % | 38.5 | % | 39.9 | % | ||||||
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Significant components of the Company’s deferred tax assets and liabilities are as follows:
February 2, 2013 |
January 28, 2012 |
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Deferred tax assets: |
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Reserves not currently deductible |
$ | 18,160 | $ | 13,207 | ||||
Employee benefits |
5,029 | 4,970 | ||||||
Net operating loss & credit carryforwards |
208 | 179 | ||||||
Accrued liabilities |
3,854 | 3,499 | ||||||
Inventory valuation |
1,280 | 1,570 | ||||||
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Total deferred tax assets |
28,531 | 23,425 | ||||||
Deferred tax liabilities: |
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Property and equipment |
39,357 | 32,414 | ||||||
Deferred rent obligation |
21,638 | 16,572 | ||||||
Prepaid expenses |
8,140 | 6,370 | ||||||
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Total deferred tax liabilities |
69,135 | 55,356 | ||||||
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Net deferred tax liability |
$ | (40,604 | ) | $ | (31,931 | ) | ||
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Description |
Balance at beginning of period |
Charged to costs and expenses |
Deductions | Balance at end of period |
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Fiscal 2012 |
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Allowance for doubtful accounts |
$ | 556 | $ | 419 | $ | (2 | )(a) | $ | 973 | |||||||
Shrink reserve |
2,445 | 8,077 | (6,502 | ) | 4,020 | |||||||||||
Inventory — lower of cost or market reserve |
2,070 | 1,099 | (805 | ) | 2,364 | |||||||||||
Insurance: |
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Workers Comp / General Liability Prepaid Asset |
(2,084 | )(b) | 4,864 | (5,180 | ) | (2,400 | ) | |||||||||
Employee Health Care Accrued Liability |
1,929 | 26,584 | (26,281 | ) | 2,232 | |||||||||||
Fiscal 2011 |
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Allowance for doubtful accounts |
$ | 257 | $ | 607 | $ | (308 | )(a) | $ | 556 | |||||||
Shrink reserve |
2,300 | 5,535 | (5,390 | ) | 2,445 | |||||||||||
Inventory — lower of cost or market reserve |
3,316 | 870 | (2,116 | ) | 2,070 | |||||||||||
Insurance: |
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Workers Comp / General Liability Prepaid Asset |
(970 | )(b) | 4,495 | (5,609 | ) | (2,084 | ) | |||||||||
Employee Health Care Accrued Liability |
1,608 | 21,036 | (20,715 | ) | 1,929 | |||||||||||
Fiscal 2010 |
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Allowance for doubtful accounts |
$ | 489 | $ | 189 | $ | (421 | )(a) | $ | 257 | |||||||
Shrink reserve |
1,869 | 5,191 | (4,760 | ) | 2,300 | |||||||||||
Inventory — lower of cost or market reserve |
4,014 | 881 | (1,579 | ) | 3,316 | |||||||||||
Insurance: |
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Workers Comp / General Liability Prepaid Asset |
(1,181 | )(b) | 4,320 | (4,109 | ) | (970 | ) | |||||||||
Employee Health Care Accrued Liability |
1,579 | 17,601 | (17,572 | ) | 1,608 |
(a) | Represents write-off of uncollectible accounts. |
(b) | Represents prepaid insurance |
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2012 | 2011 | |||||||||||||||||||||||||||||||
First | Second | Third | Fourth | First | Second | Third | Fourth | |||||||||||||||||||||||||
Net sales |
$ | 474,098 | $ | 481,683 | $ | 505,640 | $ | 758,835 | $ | 386,006 | $ | 394,567 | $ | 413,067 | $ | 582,511 | ||||||||||||||||
Cost of sales |
303,186 | 314,058 | 320,147 | 499,191 | 251,101 | 260,280 | 263,884 | 384,046 | ||||||||||||||||||||||||
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Gross profit |
170,912 | 167,625 | 185,493 | 259,644 | 134,905 | 134,287 | 149,183 | 198,465 | ||||||||||||||||||||||||
Selling, general and administrative expenses |
110,943 | 106,040 | 117,934 | 153,963 | 94,615 | 90,811 | 100,997 | 124,235 | ||||||||||||||||||||||||
Pre-opening expenses |
2,523 | 4,126 | 6,252 | 1,915 | 1,230 | 3,816 | 3,958 | 983 | ||||||||||||||||||||||||
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Operating income |
57,446 | 57,459 | 61,307 | 103,766 | 39,060 | 39,660 | 44,228 | 73,247 | ||||||||||||||||||||||||
Interest expense |
21 | 104 | 39 | 21 | 173 | 147 | 176 | 91 | ||||||||||||||||||||||||
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Income before income taxes |
57,425 | 57,355 | 61,268 | 103,745 | 38,887 | 39,513 | 44,052 | 73,156 | ||||||||||||||||||||||||
Income tax expense |
22,557 | 22,357 | 23,117 | 39,213 | 15,591 | 15,608 | 17,284 | 26,861 | ||||||||||||||||||||||||
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Net income |
$ | 34,868 | $ | 34,998 | $ | 38,151 | $ | 64,532 | $ | 23,296 | $ | 23,905 | $ | 26,768 | $ | 46,295 | ||||||||||||||||
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Net income per common share: |
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Basic |
$ | 0.56 | 0.55 | 0.60 | $ | 1.01 | $ | 0.38 | $ | 0.39 | $ | 0.44 | $ | 0.75 | ||||||||||||||||||
Diluted |
$ | 0.54 | 0.54 | 0.59 | $ | 1.00 | $ | 0.37 | $ | 0.38 | $ | 0.42 | $ | 0.73 |
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