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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 August 2, 2014, the Company operated 715 stores in 47 states, as shown in the table below. As used in these notes and throughout this Quarterly Report on Form 10-Q, all references to “we,” “us,” “our,” “Ulta” or the “Company” refer to Ulta Salon, Cosmetics & Fragrance, Inc. and its consolidated subsidiary, Ulta Inc.
State |
Number of stores |
State |
Number of stores |
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Alabama |
11 | Nebraska | 3 | |||||||
Arizona |
23 | Nevada | 7 | |||||||
Arkansas |
6 | New Hampshire | 5 | |||||||
California |
79 | New Jersey | 18 | |||||||
Colorado |
15 | New Mexico | 2 | |||||||
Connecticut |
7 | New York | 23 | |||||||
Delaware |
1 | North Carolina | 23 | |||||||
Florida |
50 | North Dakota | 1 | |||||||
Georgia |
26 | Ohio | 27 | |||||||
Idaho |
4 | Oklahoma | 9 | |||||||
Illinois |
44 | Oregon | 9 | |||||||
Indiana |
14 | Pennsylvania | 25 | |||||||
Iowa |
6 | Rhode Island | 2 | |||||||
Kansas |
5 | South Carolina | 12 | |||||||
Kentucky |
8 | South Dakota | 2 | |||||||
Louisiana |
13 | Tennessee | 10 | |||||||
Maine |
3 | Texas | 72 | |||||||
Maryland |
12 | Utah | 9 | |||||||
Massachusetts |
11 | Virginia | 20 | |||||||
Michigan |
34 | Washington | 13 | |||||||
Minnesota |
11 | West Virginia | 2 | |||||||
Mississippi |
5 | Wisconsin | 12 | |||||||
Missouri |
16 | Wyoming | 1 | |||||||
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Montana |
4 | Total | 715 |
The accompanying unaudited consolidated financial statements and related notes have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and the U.S. Securities and Exchange Commission’s Article 10, Regulation S-X. These consolidated financial statements were prepared on a consolidated basis to include the accounts of the Company and its wholly owned subsidiary. All significant intercompany accounts, transactions and unrealized profit were eliminated in consolidation. In the opinion of management, the accompanying consolidated financial statements reflect all adjustments, which are of a normal recurring nature, necessary to fairly state the financial position and results of operations and cash flows for the interim periods presented.
The Company’s business is subject to seasonal fluctuation. Significant portions of the Company’s net sales and net income are realized during the fourth quarter of the fiscal year due to the holiday selling season. The results for the 13 and 26 weeks ended August 2, 2014 are not necessarily indicative of the results to be expected for the fiscal year ending January 31, 2015, or for any other future interim period or for any future year.
These interim consolidated financial statements and the related notes should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended February 1, 2014. All amounts are stated in thousands, with the exception of per share amounts and number of stores.
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2. Summary of significant accounting policies
Information regarding the Company’s significant accounting policies is contained in Note 2, “Summary of significant accounting policies,” to the financial statements in the Company’s Annual Report on Form 10-K for the year ended February 1, 2014. Presented below in this and the following notes is supplemental information that should be read in conjunction with “Notes to Financial Statements” in the Annual Report.
Fiscal quarter
The Company’s quarterly periods are the 13 weeks ending on the Saturday closest to April 30, July 31, October 31, and January 31. The Company’s second quarters in fiscal 2014 and 2013 ended on August 2, 2014 and August 3, 2013, respectively.
Share-based compensation
The Company measures share-based compensation cost on the grant date, based on the fair value of the award, and recognizes the expense on a straight-line method over the requisite service period for awards expected to vest. The Company estimated the grant date fair value of stock options using a Black-Scholes valuation model using the following weighted-average assumptions for the periods indicated:
26 Weeks Ended | ||||||||
August 2, 2014 | August 3, 2013 | |||||||
Volatility rate |
40.9 | % | 54.6 | % | ||||
Average risk-free interest rate |
1.4 | % | 1.1 | % | ||||
Average expected life (in years) |
3.8 | 5.8 | ||||||
Dividend yield |
None | None |
The Company granted 320 and 267 stock options during the 26 weeks ended August 2, 2014 and August 3, 2013, respectively. The compensation cost that has been charged against operating income was $2,471 and $3,322 for the 13 weeks ended August 2, 2014 and August 3, 2013, respectively. The compensation cost that has been charged against operating income was $4,604 and $5,637 for the 26 weeks ended August 2, 2014 and August 3, 2013, respectively. The weighted-average grant date fair value of these options was $31.74 and $40.52, respectively. At August 2, 2014, there was approximately $20,813 of unrecognized compensation expense related to unvested stock options.
The Company issued 68 and 120 restricted stock awards during 26 weeks ended August 2, 2014 and August 3, 2013, respectively. The compensation cost that has been charged against operating income was $1,069 and $1,169 for the 13 weeks ended August 2, 2014 and August 3, 2013, respectively. The compensation cost that has been charged against operating income was $2,999 and $1,902 for the 26 weeks ended August 2, 2014 and August 3, 2013, respectively. At August 2, 2014, there was approximately $10,943 of unrecognized compensation expense related to restricted stock awards.
Recent accounting pronouncements
In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers, issued as a new Topic, Accounting Standards Codification Topic 606. The new revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle is that the Company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. This standard is effective beginning in fiscal year 2017 and 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.
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3. Commitments and contingencies
Leases – The Company leases stores, distribution and office facilities, and certain equipment. Original non-cancelable lease terms range from three to ten years, and store leases generally contain renewal options for additional years. A number of the Company’s store leases provide for contingent rentals based upon sales. Contingent rent amounts were insignificant in the 13 and 26 weeks ended August 2, 2014 and August 3, 2013. Total rent expense under operating leases was $38,941 and $33,930 for the 13 weeks ended August 2, 2014 and August 3, 2013, respectively. Total rent expense under operating leases was $77,480 and $65,940 for 26 weeks ended August 2, 2014 and August 3, 2013, respectively.
General litigation – On March 2, 2012, a putative employment class action lawsuit was filed against us and certain unnamed defendants in state court in Los Angeles County, California. On April 12, 2012, the Company removed the case to the United States District Court for the Central District of California. On August 8, 2013, the plaintiff asked the court to certify the proposed class and the Company opposed the plaintiff’s request and is waiting for the court to issue a decision. 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 has not recorded any accruals for this matter because the Company’s potential liability for the matter is not probable and cannot be reasonably estimated based on currently available information. The Company cannot determine a reasonable estimate of the maximum possible loss or range of loss for this matter given that it is in the early stage of the litigation process and is subject to the inherent uncertainties of litigation (such as the strength of the Company’s legal defenses and the availability of insurance recovery). Although the maximum amount of liability that may ultimately result from this matter cannot be predicted with certainty, management expects that this matter, when ultimately resolved, will not have a material adverse effect on the Company’s consolidated financial position or liquidity. It is possible, however, that the ultimate resolution of this matter could have a material adverse effect on the Company’s results of operations in a particular quarter or year if such resolution results in a significant liability for the Company.
The Company is also involved in various legal proceedings that are incidental to the conduct of its business. In the opinion of management, the amount of any liability with respect to these proceedings, either individually or in the aggregate, will not be material.
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4. Notes payable
On October 19, 2011, the Company entered into an Amended and Restated Loan and Security Agreement (the Loan Agreement) with Wells Fargo Bank, National Association, as Administrative Agent, Collateral Agent and a Lender thereunder, Wells Fargo Capital Finance LLC as a Lender, J.P. Morgan Securities LLC as a Lender, JP Morgan Chase Bank, N.A. as a Lender and PNC Bank, National Association, as a Lender. The Loan Agreement amended and restated the Loan and Security Agreement, dated as of August 31, 2010, by and among the lenders. The Loan Agreement extended the maturity of the Company’s credit facility to October 2016, provides maximum revolving loans equal to the lesser of $200,000 or a percentage of eligible owned inventory, contains a $10,000 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 Amended and Restated Loan and Security Agreement (the First Amendment) with the lender group. The First Amendment updated certain administrative terms and conditions and provides the Company greater flexibility to take certain corporate actions. There were no changes to the revolving loan amounts available, interest rates, covenants or maturity date under terms of the Loan Agreement.
On December 6, 2013, the Company entered into Amendment No. 2 to the Amended and Restated Loan and Security Agreement (the Second Amendment) with the lender group. The Second Amendment extended the maturity of the facility to December 2018. Substantially all of the Company’s assets are pledged as collateral for outstanding borrowings under the facility. Outstanding borrowings will bear interest at the prime rate or Libor plus 1.50% and the unused line fee is 0.20%.
As of August 2, 2014, February 1, 2014 and August 3, 2013, the Company had no borrowings outstanding under the credit facility and the Company was in compliance with all terms and covenants of the agreement.
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5. Investments
The Company’s short-term investments as of August 2, 2014 consist of $50,000 in certificates of deposit and $50,146 in time deposits. 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 August 2, 2014.
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6. Fair Value Measurements
The carrying value of cash and cash equivalents, accounts receivable, and accounts payable approximates their estimated fair values due to the short maturities of these instruments.
Fair value is measured using inputs from the three levels of the fair value hierarchy, which are described as follows:
• | Level 1 – observable inputs such as quoted prices for identical instruments in active markets. |
• | Level 2 – inputs other than quoted prices in active markets that are observable either directly or indirectly through corroboration with observable market data. |
• | Level 3 – unobservable inputs in which there is little or no market data, which would require the Company to develop its own assumptions. |
As of August 2, 2014, the Company held financial liabilities of $4,494 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. Subsequent event
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 may repurchase up to $300,000 of the Company’s common stock. The 2014 Share Repurchase Program authorization revokes the previously authorized but unused amounts of $112,664 from the 2013 Share Repurchase Program. The Company’s intention is to repurchase shares to offset equity dilution and to repurchase shares based on market conditions to return excess cash to shareholders. The 2014 Share Repurchase Program does not have an expiration date and may be suspended or discontinued at any time.
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Fiscal quarter
The Company’s quarterly periods are the 13 weeks ending on the Saturday closest to April 30, July 31, October 31, and January 31. The Company’s second quarters in fiscal 2014 and 2013 ended on August 2, 2014 and August 3, 2013, respectively.
Share-based compensation
The Company measures share-based compensation cost on the grant date, based on the fair value of the award, and recognizes the expense on a straight-line method over the requisite service period for awards expected to vest.
Recent accounting pronouncements
In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers, issued as a new Topic, Accounting Standards Codification Topic 606. The new revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle is that the Company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. This standard is effective beginning in fiscal year 2017 and 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.
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As of August 2, 2014, the Company operated 715 stores in 47 states, as shown in the table below. As used in these notes and throughout this Quarterly Report on Form 10-Q, all references to “we,” “us,” “our,” “Ulta” or the “Company” refer to Ulta Salon, Cosmetics & Fragrance, Inc. and its consolidated subsidiary, Ulta Inc.
State |
Number of stores |
State |
Number of stores |
|||||||
Alabama |
11 | Nebraska | 3 | |||||||
Arizona |
23 | Nevada | 7 | |||||||
Arkansas |
6 | New Hampshire | 5 | |||||||
California |
79 | New Jersey | 18 | |||||||
Colorado |
15 | New Mexico | 2 | |||||||
Connecticut |
7 | New York | 23 | |||||||
Delaware |
1 | North Carolina | 23 | |||||||
Florida |
50 | North Dakota | 1 | |||||||
Georgia |
26 | Ohio | 27 | |||||||
Idaho |
4 | Oklahoma | 9 | |||||||
Illinois |
44 | Oregon | 9 | |||||||
Indiana |
14 | Pennsylvania | 25 | |||||||
Iowa |
6 | Rhode Island | 2 | |||||||
Kansas |
5 | South Carolina | 12 | |||||||
Kentucky |
8 | South Dakota | 2 | |||||||
Louisiana |
13 | Tennessee | 10 | |||||||
Maine |
3 | Texas | 72 | |||||||
Maryland |
12 | Utah | 9 | |||||||
Massachusetts |
11 | Virginia | 20 | |||||||
Michigan |
34 | Washington | 13 | |||||||
Minnesota |
11 | West Virginia | 2 | |||||||
Mississippi |
5 | Wisconsin | 12 | |||||||
Missouri |
16 | Wyoming | 1 | |||||||
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Montana |
4 | Total | 715 |
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The Company estimated the grant date fair value of stock options using a Black-Scholes valuation model using the following weighted-average assumptions for the periods indicated:
26 Weeks Ended | ||||||||
August 2, 2014 | August 3, 2013 | |||||||
Volatility rate |
40.9 | % | 54.6 | % | ||||
Average risk-free interest rate |
1.4 | % | 1.1 | % | ||||
Average expected life (in years) |
3.8 | 5.8 | ||||||
Dividend yield |
None | None |
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