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Item 7. Management’s Discussion and Analysis

2021-03-26 compared with 2020-03-27 · 155 added, 121 removed, 230 unchanged (55% of the section changed)

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We define our target consumer as a beauty enthusiast, a consumer who is passionate about the beauty category and has high expectations for the shopping experience.

We estimate the beauty enthusiasts represents approximately 57% of shoppers and 77% of spend in the U.S.

We estimate that beauty enthusiasts represent approximately 57% of shoppers and 77% of spend in the U.S.

beauty category.

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Key aspects of our business include:

our ability to offer our guests a unique combination of more than 25,000 beauty products from across the categories of prestige and mass cosmetics, fragrance, haircare, skincare, bath and body products, and salon styling tools, as well as a full-service salon in every store featuring hair, skin, and brow services;

our ability to offer our guests a unique combination of more than 25,000 beauty products from across the categories of prestige and mass cosmetics, fragrance, haircare, prestige and mass skincare, bath and body products, and salon styling tools, as well as a full-service salon in every store featuring hair, skin, and brow services;

our focus on delivering a compelling value proposition to our guests across all of our product categories;

and convenience, as our stores are predominantly located in convenient, high-traffic locations such as power centers.

The continued growth of our business and any future increases in net sales, net income, and cash flows is dependent on our ability to execute our strategic imperatives:

1) drive growth across beauty enthusiast consumer groups, 2) deepen Ulta Beauty love and loyalty, 3) deliver a one of a kind, world class beauty assortment, 4) lead the in-store and beauty services experience transformation, 5) reinvent beauty digital engagement, 6) deliver operational excellence and drive efficiencies, and 7) invest in talent that drives a winning culture.

The continued growth of our business and any future increases in net sales, net income, and cash flows is dependent on our ability to execute our strategic priorities:

1) build omnichannel operations that more deeply connects guests across channels, 2) reimagine how guests experience and discover beauty, 3) drive market share growth through the deployment of winning category strategies, 4) deepen Ulta Beauty love and loyalty, 5) drive holistic cost optimization, and 6) develop our talent and strengthen our culture.

We believe that the expanding U.S.

beauty products and salon services industry, the shift in distribution channel of prestige beauty products from department stores to specialty retail stores, coupled with Ulta Beauty’s competitive strengths, positions us to capture additional market share in the industry.

beauty products and salon services

industry, the shift in distribution channel of prestige beauty products from department stores to specialty retail stores, coupled with Ulta Beauty’s competitive strengths, position us to capture additional market share in the industry.

Comparable sales is a key metric that is monitored closely within the retail industry.

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Over the long term, our growth strategy is to increase total net sales through increases in our comparable sales, opening new stores, and increasing omnichannel capabilities.

Operating profit is expected to increase as a result of our ability to expand merchandise margin and leverage our fixed store costs with comparable sales increases and operating efficiencies offset by incremental investments in people, systems, and supply chain required to support a 1,500 to 1,700 store chain in the U.S.

Long-term operating profit is expected to increase as a result of our ability to expand merchandise margin and leverage our fixed store costs with comparable sales increases and operating efficiencies offset by incremental investments in people, systems, and supply chain required to support a 1,500 to 1,700 store chain in the U.S.

with successful e-commerce and competitive omnichannel capabilities.

Current business trends

Our research indicates that Ulta Beauty continues to drive meaningful market share across all categories.

COVID-19 response

We have been and continue to closely monitor the impact of the COVID-19 outbreak on all facets of our business.

We have taken decisive actions to protect the safety of our associates and guests and to manage the business throughout the fluid and challenging environment resulting from the COVID-19 pandemic.

In late 2019, COVID-19 was detected in Wuhan, China and other jurisdictions, prompting the Chinese government to quarantine certain affected regions and impose both internal and external travel restrictions within the country.

The virus has since spread to every other part of the world, including the U.S., and in March 2020, the World Health Organization declared COVID-19 a global pandemic.

Federal, state, and local governments have since implemented various restrictions, including travel restrictions, border closings, restrictions on public gatherings, quarantining of people who may have been exposed to the virus, shelter-in-place restrictions and limitations on business operations.

In response to government recommendations and for the health and safety of our associates and guests, on March 19, 2020 we temporarily closed all stores across the U.S., while continuing to support our essential e-commerce operations.

Effective April 19, 2020, we temporarily furloughed many of our store and salon associates.

In April 2020, we introduced curbside pickup, and in May 2020, we began reopening stores.

Throughout the second quarter, stores were reopened on a phased timeline, by taking a thoughtful, measured approach based on a variety of criteria, including state and local guidelines and the adoption of our new Shop Safe Standards.

As of July 20, 2020, we completed our phased reopening process.

By October 31, 2020, salon and brow services had resumed in almost all stores.

Due to COVID-19 restrictions, we have not resumed skin and makeup services but we have plans to resume skin and makeup services as soon as it is safe to do so.

Our results of operations for the fiscal year ended January 30, 2021 were significantly impacted by the effects of the COVID-19 pandemic.

Comparable sales decreased 17.9% for the fiscal year ended January 30, 2021 as a result of the COVID-19 pandemic, but the multi-year, strategic investments we have made to enhance our omnichannel and supply chain capabilities, combined with the ongoing commitment of our distribution associates, have enabled us to support increased e-commerce demand and strong guest engagement.

In addition to decreases in net revenue, our overall profitability also decreased as compared to the prior year.

These developments have further required us to recognize certain long-lived asset impairment charges and restructuring charges.

Further, in connection with the Coronavirus Aid,

Relief, and Economic Security (CARES) Act, we recognized payroll subsidies as a reduction of selling, general and administrative expenses in the consolidated statement of operations.

As we navigated these unprecedented circumstances, we continued to focus on our financial flexibility, including drawing down $800.0 million under our $1.0 billion revolving credit facility on March 18, 2020, which was repaid in full on September 2, 2020.

In addition, we took the following steps to preserve financial liquidity:

● limited new hires and delayed merit increases for all corporate, store, and salon associates;

● reduced marketing, travel and controllable expenses;

● aligned inventory receipts with current sales trends;

● prioritized payment obligations;

● reduced new store openings, relocations and remodel projects;

● suspended the stock repurchase program, which resumed in the fourth quarter of fiscal 2020.

To help support our associates through this crisis, we expanded the criteria for our Associate Relief Program to include those who need assistance due to a personal hardship as a result of the COVID-19 pandemic.

The Ulta Beauty executive team and Board of Directors have each made personal donations to the program.

Sales are expected to be challenged as events continue to change, and we are unable to accurately predict the future impact that the COVID-19 pandemic will have on our results of operations due to uncertainties including, but not limited to, the potential temporary reclosing of certain of our stores, the potential temporary restrictions on certain store operating hours and/or in-store capacity, the duration of potential future quarantines, shelter-in-place and other travel restrictions within the U.S.

and other affected countries, the duration of the pandemic and any more dangerous variants of the virus, the duration, timing and severity of the impact on consumer spending, the timing and effectiveness of vaccine distribution, and how quickly and to what extent normal economic and operating conditions can resume.

Industry trends

Our research indicates that Ulta Beauty has captured meaningful market share across all categories over the last several years.

However, our research also suggests that the cosmetics category in the overall U.S.

market experienced mid-single digit declines through fiscal 2019.

market experienced mid-single digit declines through fiscal 2019 and 2020.

Beauty cycles are impacted by demographics and innovation.

While demographic trends continue to be favorable, we believe a lack of incremental innovation has resulted in a challenging cycle for the cosmetics category, as innovation brought to the market has not resulted in incremental product purchases.

Despite the overall market decline in the cosmetics category, we remain confident that our differentiated and diverse business model, our commitment to strategic investments, and our highly engaged associates will continue to drive market share gains.

The virus has since spread to almost every other part of the world, including the U.S., and in March 2020, the World Health Organization declared COVID-19 a global pandemic.

In response to government recommendations and for the health and safety of our associates and guests, we announced on March 17, 2020 our decision to temporarily close all stores across the U.S.

While too early to quantify, our sales and results of operations will be negatively impacted by this decision.

Even after our stores are re-opened, the virus could also negatively impact our results of operations by continuing to weaken demand for our products and services and/or by disrupting our supply chain.

As events are rapidly changing, we are unable to accurately predict the impact that COVID-19 will have on our results of operations due to uncertainties including, but not limited to, the duration of the closing of our stores, the duration of quarantines, shelter-in-place and other travel restrictions within the U.S.

and other affected countries, the severity of the virus, the duration of the outbreak, and the public’s response to the outbreak and its eventual aftermath.

In addition, the COVID-19 pandemic and its various impacts have changed consumer behavior and consumption of beauty products due to the closures of offices, retail stores and other businesses and the significant decline in social gatherings.

We expect the beauty category will return to growth as consumers recover from the impacts of COVID-19, and we remain confident that our differentiated and diverse business model, our commitment to strategic investments, and our highly engaged associates will continue to drive market share gains over the long term.

Basis of presentation

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We recognize merchandise revenue at the point of sale in our retail stores.

E-commerce merchandise sales are recognized based upon shipment of merchandise to the guest based on meeting the transfer of control criteria.

E-commerce sales are recognized upon shipment or guest pickup of the merchandise based on meeting the transfer of control criteria.

Retail store and e-commerce sales are recorded net of estimated returns.

Shipping and handling are treated as costs to fulfill the contract and not a separate performance obligation.

Accordingly, we recognize revenue for our single performance obligation related to online sales at the time control of the merchandise passes to the customer, which is at the time of shipment.

Accordingly, we recognize revenue for our single performance obligation related to online sales at the time control of the merchandise passes to the customer, which is at the time of shipment or guest pickup.

We provide refunds for merchandise returns within 60 days from the original purchase date;

however, due to store closures during the first half of fiscal 2020, we extended our return policy to 180 days through November 16, 2020.

State sales taxes are presented on a net basis as we consider our self a pass-through conduit for collecting and remitting state sales tax.

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Gift card sales revenue is deferred until the guest redeems the gift card.

Company coupons and other incentives are recorded as a reduction of net sales.

Company coupons and other incentives are recorded as a

reduction of net sales.

Other revenue sources include the private label and co-branded credit card programs, as well as deferred revenue related to the loyalty program and gift card breakage.

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Therefore, a store is included in our comparable store base on the first day of the period after one year of operations plus the initial one-month grand opening period.

Non-comparable store sales include sales from new stores that have not yet completed their 13 th month of operation and stores that were closed for part or all of the period in either year as a result of remodel activity.

Non-comparable store sales include sales from new stores that have not yet completed their 13 th month of operation and stores that were closed for part or all of the period in either year.

Remodeled stores are included in comparable sales unless the store was closed for a portion of the current or prior period.

Comparable sales include retail sales, salon services, and e-commerce.

Comparable sales include retail sales and salon services (including stores temporarily closed due to COVID-19), and e-commerce.

There may be variations in the way in which some of our competitors and other retailers calculate comparable or same store sales.

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● shipping and handling costs;

● retail stores occupancy costs including rent, depreciation and amortization, real estate taxes, utilities, repairs and maintenance, insurance, licenses, and cleaning expenses;

● retail stores occupancy costs including rent, depreciation and amortization, real estate taxes, utilities, repairs and maintenance, insurance, and licenses;

● salon services payroll and benefits;

● shrink and inventory valuation reserves.

Our cost of sales may be negatively impacted as we open an increasing number of stores.

Our cost of sales may be negatively impacted as we open new stores.

Changes in our merchandise mix may also have an impact on cost of sales.

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Selling, general and administrative expenses include:

● payroll, bonus, and benefit costs for retail stores and corporate employees;

● payroll, bonus, and benefit costs for retail store and corporate employees;

● advertising and marketing costs;

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This presentation of items in selling, general and administrative expenses may not be comparable to the way in which our competitors or other retailers compute their selling, general and administrative expenses.

Impairment, restructuring and other costs include long-lived asset impairment charges, restructuring costs associated with store closings, costs associated with the suspension of our Canadian expansion, and employee related severance costs.

Pre-opening expenses include non-capital expenditures during the period prior to store opening for new, remodeled, and relocated stores including rent during the construction period for new and relocated stores, store set-up labor, management and employee training, and grand opening advertising.

Interest income, net includes both interest income and expense.

Interest income represents interest from cash equivalents and short-term investments with maturities of twelve months or less from the date of purchase.

Interest expense (income), net includes both interest income and expense.

Interest expense includes interest costs and facility fees associated with our credit facility, which is structured as an asset-based lending instrument.

Our credit facility interest is based on a variable interest rate structure which can result in increased cost in periods of rising interest rates.

Interest income represents interest from cash equivalents and short-term investments with maturities of twelve months or less from the date of purchase.

Income tax expense reflects the federal statutory tax rate and the weighted average state statutory tax rate for the states in which we operate stores.

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Our fiscal years are the 52- or 53-week periods ending on the Saturday closest to January 31.

The Company’s fiscal years ended February 1, 2020 (fiscal 2019), February 2, 2019 (fiscal 2018), and February 3, 2018 (fiscal 2017) were 52, 52, and 53-week years, respectively.

As of February 1, 2020, we operated 1,254 stores across 50 states.

The Company’s fiscal years ended January 30, 2021 (fiscal 2020), February 1, 2020 (fiscal 2019), and February 2, 2019 (fiscal 2018) were all 52-week years.

As of January 30, 2021, we operated 1,264 stores across 50 states.

The following tables present the components of our consolidated results of operations for the periods indicated:

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Selling, general and administrative expenses

Impairment, restructuring and other costs

Pre-opening expenses

Operating income

Interest income, net

Interest expense (income), net

Income before income taxes

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Other operating data:

Number of stores end of period

Comparable sales increase

Number of stores end of year

Comparable sales

Fiscal year ended

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Selling, general and administrative expenses

Impairment, restructuring and other costs

Pre-opening expenses

Operating income

Interest income, net

Interest expense (income), net

Income before income taxes

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Fiscal year 2020 versus fiscal year 2019

Net sales increased $681.5 million, or 10.1%, to $7,398.1 million in fiscal 2019 compared to $6,716.6 million in fiscal 2018.

Net sales decreased $1.2 billion, or 16.8%, to $6.2 billion in fiscal 2020 compared to $7.4 billion in fiscal 2019.

The net sales decrease was driven by the negative impacts of the COVID-19 pandemic, including the temporary closing of our brick-and-mortar retail stores, social distancing and quarantines, reduction of operating hours, and limitations on in-store capacity, and a decrease of $6.6 million in other revenue.

Total comparable sales in fiscal 2020 decreased 17.9% compared to an increase of 5.0% in fiscal 2019.

During fiscal 2020, transactions declined 24.5% and average ticket increased 8.8%.

Gross profit decreased $0.7 billion, or 27.3%, to $1.9 billion in fiscal 2020, compared to $2.7 billion in fiscal 2019.

Gross profit as a percentage of net sales decreased 450 basis points to 31.7% in fiscal 2020 compared to 36.2% in fiscal 2019.

The decrease in gross profit margin was primarily due to:

● 220 basis points of deleverage due to channel mix shifts;

● 220 basis points deleverage of fixed costs and 90 basis points of deleverage in salon services, both attributed to the impact of lower sales;

partially offset by

● 80 basis points of leverage driven by lower promotional activity and cost optimization efforts.

Selling, general and administrative expenses

Selling, general and administrative (SG&A) expenses decreased $0.2 billion, or 10.1%, to $1.6 billion in fiscal 2020 compared to $1.8 billion in fiscal 2019.

As a percentage of net sales, SG&A expenses increased 190 basis points to 25.7% in fiscal 2020 compared to 23.8% in fiscal 2019.

The deleverage in SG&A expenses was primarily due to:

● 170 basis points of deleverage primarily due to higher corporate overhead;

● 80 basis points of deleverage of store payroll and benefits and variable store expenses due to the impact of lower sales and personal protective equipment and COVID-related expenses;

● 30 basis points of deleverage of marketing expenses attributed to the impact of lower sales volume;

partially offset by

● 90 basis points of leverage related to the employee retention credits made available under the CARES Act.

Impairment, restructuring and other costs

Impairment, restructuring and other costs were $114.3 million for fiscal 2020, which consisted of $41.9 million due to the impairment of tangible long-lived assets and operating lease assets associated with certain retail stores, $29.1 million related to the suspension of the planned expansion to Canada, $27.5 million related to the permanent closure of 19 stores, and $15.8 million of severance charges.

All restructuring expenses were recognized in fiscal 2020.

There was no impairment, restructuring and other costs in fiscal 2019.

Pre-opening expenses

Pre-opening expenses decreased $4.3 million, or 22.1%, to $15.0 million in fiscal 2020 compared to $19.3 million in fiscal 2019 due to current year real estate activity and stores expected to open in the first quarter of fiscal 2021.

During fiscal 2020, we opened 30 new stores and relocated five stores.

During fiscal 2019, we opened 86 new stores, remodeled 12 stores, and relocated eight stores.

Interest expense (income), net

Interest expense, net was $5.7 million in fiscal 2020 compared to $5.1 million of interest income, net in fiscal 2019.

Interest expense represents interest on borrowings and fees related to the credit facility.

Interest income results from cash equivalents and short-term investments with maturities of twelve months or less from the date of purchase.

We did not have any outstanding borrowings on our credit facility as of January 30, 2021 and February 1, 2020.

Income tax expense

Income tax expense of $55.3 million in fiscal 2020 represents an effective tax rate of 23.9%, compared to fiscal 2019 income tax expense of $200.2 million and an effective tax rate of 22.1%.

The higher effective tax rate is primarily due to less investment tax credits received and tax expense from the income tax accounting for stock-based compensation compared to a benefit in fiscal 2019.

Net income decreased $530.1 million, or 75.1%, to $175.8 million in fiscal 2020 compared to $705.9 million in fiscal 2019.

The decrease in net income was primarily due to a $731.9 million decrease in gross profit and a $114.3 million increase in impairment, restructuring and other costs, partially offset by a $177.6 million decrease in SG&A expenses and $145.0 million decrease in income taxes.

Fiscal year 2019 versus fiscal year 2018

Net sales increased $0.7 billion, or 10.1%, to $7.4 billion in fiscal 2019 compared to $6.7 billion in fiscal 2018.

The net sales increases are due to the opening of 80 net new stores in 2019, a 5.0% increase in comparable sales, and an increase of $23.4 million in other revenue.

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We attribute the increase in comparable sales to our successful marketing and merchandising strategies.

Gross profit increased $271.8 million, or 11.3%, to $2,681.1 million in fiscal 2019, compared to $2,409.3 million in fiscal 2018.

Gross profit increased $0.3 billion, or 11.3%, to $2.7 billion in fiscal 2019, compared to $2.4 billion in fiscal 2018.

Gross profit as a percentage of net sales increased 30 basis points to 36.2% in fiscal 2019 compared to 35.9% in fiscal 2018.

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Selling, general and administrative expenses

Selling, general and administrative (SG&A) expenses increased $225.3 million, or 14.7%, to $1,760.7 million in fiscal 2019 compared to $1,535.5 million in fiscal 2018.

SG&A expenses increased $0.2 billion, or 14.7%, to $1.8 billion in fiscal 2019 compared to $1.5 billion in fiscal 2018.

As a percentage of net sales, SG&A expenses increased 90 basis points to 23.8% in fiscal 2019 compared to 22.9% in fiscal 2018.

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Income tax expense of $200.2 million in fiscal 2019 represents an effective tax rate of 22.1%, compared to fiscal 2018 income tax expense of $200.6 million and an effective tax rate of 23.3%.

The lower tax rate is primarily due to income tax accounting for share-based compensation and federal income tax credits.

The lower tax rate is primarily due to income tax accounting for stock-based compensation and federal income tax credits.

Net income increased $47.4 million, or 7.2%, to $705.9 million in fiscal 2019 compared to $658.6 million in fiscal 2018.

The increase in net income was primarily due to a $271.8 million increase in gross profit partially offset by a $225.3 million increase in SG&A expenses.

Fiscal year 2018 versus fiscal year 2017

Net sales increased $832.1 million, or 14.1%, to $6,716.6 million in fiscal 2018 compared to $5,884.5 million in fiscal 2017.

The net sales increases are due to the opening of 100 net new stores in fiscal 2018, an 8.1% increase in comparable sales, and other revenue increased $48.9 million.

The sales for the 53 rd week of fiscal 2017 were approximately $108.8 million .

The 8.1% comparable sales increase included a 5.3% increase in transactions and a 2.8% increase in average ticket.

We attribute the increase in comparable sales to our successful marketing and merchandising strategies.

Gross profit increased $312.5 million, or 14.9%, to $2,409.3 million in fiscal 2018, compared to $2,096.8 million in fiscal 2017.

Gross profit as a percentage of net sales increased 30 basis points to 35.9% in fiscal 2018 compared to 35.6% in fiscal 2017.

The impact of new revenue recognition accounting drove 55 basis points of leverage.

The remaining 25 basis points of deleverage in gross profit margin was primarily due to:

● 55 basis points deleverage attributed to category and channel mix shifts and investments in our salon services and supply chain operation, partially offset by;

● 30 basis points leverage in fixed store costs attributed to the impact of higher sales volume.

Selling, general and administrative expenses

SG&A expenses increased $248.2 million, or 19.3%, to $1,535.5 million in fiscal 2018 compared to $1,287.2 million in fiscal 2017.

As a percentage of net sales, SG&A expenses increased 100 basis points to 22.9% in fiscal 2018 compared to 21.9% in fiscal 2017.

The impact of new revenue recognition accounting drove 80 basis points of deleverage.

The remaining 20 basis points of deleverage in SG&A expenses was primarily due to:

● 30 basis points deleverage due to investments in store labor to support growth initiatives, partially offset by;

● 10 basis points leverage in corporate overhead due to the impact of higher sales volume.

Pre-opening expenses

Pre-opening expenses decreased $4.5 million, or 18.6%, to $19.8 million in fiscal 2018 compared to $24.3 million in fiscal 2017.

During fiscal 2018, we opened 107 new stores, remodeled 13 stores, and relocated two stores.

During fiscal 2017, we opened 102 new stores, remodeled 11 stores, and relocated seven stores.

Interest income, net

Interest income, net was $5.1 million in fiscal 2018 compared to $1.6 million in fiscal 2017.

Interest income results from cash equivalents and short-term investments with maturities of twelve months or less from the date of purchase.

Interest expense represents interest on borrowings and fees related to the credit facility.

We did not have any outstanding borrowings on our credit facility as of February 2, 2019 and February 3, 2018.

Income tax expense

Income tax expense of $200.6 million in fiscal 2018 represents an effective tax rate of 23.3%, compared to fiscal 2017 income tax expense of $231.6 million and an effective tax rate of 29.4%.

The lower tax rate is primarily due tax reform.

Net income increased $103.3 million, or 18.6%, to $658.6 million in fiscal 2018 compared to $555.2 million in fiscal 2017.

The increase in net income was primarily due to a $312.5 million increase in gross profit and a $31.0 million decrease in income tax expense, which was partially offset by a $248.2 million increase in SG&A expenses.

Liquidity and capital resources

Our primary cash needs are for rent, capital expenditures for new, remodeled, relocated, and refreshed stores (prestige boutiques and related in-store merchandising upgrades), increased merchandise inventories related to store expansion and new brand additions, in-store boutiques (sets of custom-designed fixtures configured to prominently display certain prestige brands within our stores), supply chain improvements, share repurchases, and continued improvement in our information technology systems.

Our primary cash needs are for rent, capital expenditures for new, remodeled, and relocated stores, increased merchandise inventories related to store expansion and new brand additions, supply chain improvements, share repurchases, and continued improvement in our information technology systems.

Our primary sources of liquidity are cash and cash equivalents, short-term investments, cash flows from operations, including changes in working capital, and borrowings under our credit facility.

The most significant component of our working capital is merchandise inventories and cash and cash equivalents reduced by related accounts payable and accrued expenses.

The most significant components of our working capital are merchandise inventories and cash and cash equivalents reduced by related accounts payable and accrued expenses.

Our working capital needs are greatest from August through November each year as a result of our inventory build-up during this period for the approaching holiday season.

This is also the time of year when we are at maximum investment levels in our new store class and may not have collected all of the landlord allowances due to us as part of our lease agreements.

Based on past performance and current expectations, we believe that cash and cash equivalents, short-term investments, cash generated from operations, and borrowings under the credit facility will satisfy the Company’s working capital needs, capital expenditure needs, commitments, and other liquidity requirements through at least the next twelve months.

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Net cash used in financing activities

Effect of exchange rate changes on cash and cash equivalents

Net increase (decrease) in cash and cash equivalents

Operating activities

Operating activities consist of net income adjusted for certain non-cash items, including depreciation and amortization, non-cash lease expense, deferred income taxes, stock-based compensation, realized gains or losses on disposal of property and equipment, and the effect of working capital changes.

The fiscal 2019 increase over fiscal 2018 is mainly due to the increase in net income, merchandise inventories, other assets and liabilities, and the timing of prepaid expenses and other assets, partially offset by the timing of accounts payable.

The increase in net income was due to an increase in gross profit due to sales increases and improvements in merchandise margins, partially offset by increased SG&A expenses due to investments in future growth.

Changes in other assets and liabilities was primarily due to increased participation in our deferred compensation plan.

Merchandise inventories, net were $1,293.7 million at February 1, 2020, compared to $1,214.3 million at February 2, 2019, representing an increase of $79.4 million or 6.5%.

Average inventory per store (defined as merchandise inventory divided by number of stores open) was flat compared to prior year.

The increase in inventory is primarily due to the addition on 80 net new stores opened since February 2, 2019.

Operating activities consist of net income adjusted for certain non-cash items, including depreciation and amortization, non-cash lease expense, long-lived asset impairment charge, deferred income taxes, stock-based compensation expense, realized gains or losses on disposal of property and equipment, and the effect of working capital changes.

The fiscal 2020 decrease over fiscal 2019 is mainly due to the decrease in net income, merchandise inventories, and the timing of accounts payable.

The decrease in net income was primarily due to a decrease in gross profit resulting from lower sales as a result of the COVID-19 pandemic and an increase in impairment, restructuring and other costs, partially offset by a decrease in SG&A expenses and income taxes.

Merchandise inventories, net were $1.2 billion at January 30, 2021, compared to $1.3 billion at February 1, 2020, representing a decrease of $125.5 million or 9.7%.

The decrease in total inventory was primarily driven by reduced store inventory due to a decline in store traffic trends, partially offset by an increase due to 10 net new stores opened since February 1, 2020 and the opening of our Jacksonville fast fulfillment center.

Investing activities

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Investment activities for capital expenditures were $151.9 million in fiscal 2020 compared to $298.5 million and $319.4 million in fiscal 2019 and 2018, respectively.

Capital expenditures decreased in fiscal 2019 compared to fiscal 2018 primarily from lower merchandising fixtures due to less spend on store refreshes and a decrease in the number of store openings, offset by increases in store maintenance and other due to corporate office renovations.

Purchases of short-term investments were $110.0 million during fiscal 2019 and consist of certificates of deposit with maturities of three to twelve months from the date of purchase.

Capital expenditures decreased in fiscal 2020 compared to fiscal 2019 due to actions we took to preserve liquidity as we navigated through the COVID-19 pandemic.

Proceeds of short-term investments were $110.0 million during fiscal 2020 and consist of certificates of deposit with maturities of three to twelve months from the date of purchase.

During fiscal 2020, we contributed $5.7 million to equity method investments.

The following table presents a summary of our store activities in fiscal years 2020, 2019, and 2018:

Fiscal year ended

Stores opened

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During fiscal 2020, the average investment required to open a new Ulta Beauty store was approximately $1.4 million, which includes capital investment net of landlord contributions, pre-opening expenses, and initial inventory net of payables.

The average investment required to remodel an Ulta Beauty store was approximately $0.9 million in fiscal 2019.

The average investment required to refresh an Ulta Beauty store was approximately $0.1 million in fiscal 2019.

Capital expenditures for fiscal 2020, 2019 and 2018 by major category are as follows:

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Financing activities

Financing activities in fiscal 2019, 2018, and 2017 consist principally of share repurchases and capital stock transactions.

Financing activities in fiscal 2020, 2019 and 2018 consist principally of borrowing and repayment of our revolving credit facility, share repurchases, and capital stock transactions.

Purchases of treasury shares represent the fair value of common shares repurchased from plan participants in connection with shares withheld to satisfy minimum statutory tax obligations upon the vesting of restricted stock.

We had no borrowings outstanding under our credit facility at the end of fiscal 2020, 2019 and 2018.

The zero outstanding borrowings position is due to a combination of factors including strong sales growth, overall performance of management initiatives including expense control as well as inventory and other working capital reductions.

require borrowings under the facility from time to time in future periods for unexpected business disruptions, to support our new store program, share repurchases, and seasonal inventory needs.

As a precautionary measure and to enhance financial flexibility in light of the uncertainty arising from the spread of COVID-19, on March 23, 2020, the Company announced that it drew down $800 million under the amended Loan Agreement.

At the beginning of the COVID-19 pandemic, we drew down $800.0 million of our $1.0 billion revolving credit facility and suspended our share repurchase program.

We repaid the $800.0 million of borrowings on September 2, 2020 and resumed share repurchases in the fourth quarter.

The zero outstanding borrowings position continues to be due to a combination of factors including an improvement in sales trends in the second half of the year, overall performance of management initiatives including expense control as well as inventory and other working capital reductions.

We may require borrowings under the facility from time to time in future periods for unexpected business disruptions, to support our new store program, share repurchases, and seasonal inventory needs.

Share repurchase plan

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The 2018 Share Repurchase Program did not have an expiration date but provided for suspension or discontinuation at any time.

On March 15, 2018, we announced that the Board of Directors authorized a share repurchase program (the 2018 Share Repurchase Program) pursuant to which the Company could repurchase up to $625.0 million of the Company’s common stock.

The 2018 Share Repurchase Program authorization revoked the previously authorized but unused amount of $41.3 million from the 2017 Share Repurchase Program.

The 2018 Share Repurchase Program did not have an expiration date but provided for suspension or discontinuation at any time.

On March 14, 2019, we announced that the Board of Directors authorized a new share repurchase program (the 2019 Share Repurchase Program) pursuant to which the Company could repurchase up to $875.0 million of the Company’s common stock.

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The 2019 Share Repurchase Program did not have an expiration date but provided for suspension or discontinuation at any time.

On March 12, 2020, we announced that the Board of Directors authorized a new share repurchase program (the 2020 Share Repurchase Program) pursuant to which the Company may repurchase up to $1.6 billion of the Company’s common stock.

The 2020 Share Repurchase Program authorization revoked the previously authorized but unused amounts of $177.8 million from the 2019 Share Repurchase Program.

The 2020 Share Repurchase Program does not have an expiration date and may be suspended or discontinued at any time.

On April 2, 2020, we announced that the share repurchase program had been suspended in order to strengthen liquidity and preserve cash while navigating the COVID-19 pandemic.

The program resumed during the fourth quarter of fiscal 2020.

A summary of the Company’s common stock repurchase activity is presented in the following table:

Fiscal year ended

(Dollars in millions)

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Total cost of shares repurchased

The 2020 Share Repurchase Program authorization revokes the previously authorized but unused amounts of $214.6 million from the 2019 Share Repurchase Program.

The 2020 Share Repurchase Program does not have an expiration date and may be suspended or discontinued at any time.

Credit facility

On August 23, 2017, we entered into a Second Amended and Restated Loan Agreement (the Loan Agreement) with Wells Fargo Bank, National Association, as Administrative Agent, Collateral Agent and a Lender thereunder;

On March 11, 2020, we entered into Amendment No.

1 to the Second Amended and Restated Loan Agreement (as so amended, the Loan Agreement) with Wells Fargo Bank, National Association, as Administrative Agent, Collateral Agent and a Lender thereunder;

Wells Fargo Bank, National Association and JPMorgan Chase Bank, N.A., as Lead Arrangers and Bookrunners;

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and the other lenders party thereto.

The Loan Agreement matures on August 23, 2022, provides maximum revolving loans equal to the lesser of $400.0 million or a percentage of eligible owned inventory (which borrowing base may, at the election of the Company and satisfaction of certain conditions, include a percentage of eligible owned receivables and qualified cash), contains a $20.0 million subfacility for letters of credit and allows the Company to increase the revolving facility by an additional $50.0 million, subject to the consent by each lender and other conditions.

The Loan Agreement matures on March 11, 2025, provides maximum revolving loans equal to the lesser of $1.0 billion or a percentage of eligible owned inventory and eligible owned receivables (which borrowing base may, at the election of the Company and satisfaction of certain conditions, include a percentage of qualified cash), contains a $50.0 million subfacility for letters of credit and allows the Company to increase the revolving facility by an additional $100.0 million, subject to the consent by each lender and other conditions.

The Loan Agreement contains a requirement to maintain a fixed charge coverage ratio of not less than 1.0 to 1.0 during such periods when availability under the Loan Agreement falls below a specified threshold.

Substantially all of the Company’s assets are pledged as collateral for outstanding borrowings under the Loan Agreement.

Outstanding borrowings will bear interest at either a base rate or the LIBOR plus 1.25%, and the unused line fee is 0.20% per annum.

As of February 1, 2020 and February 2, 2019, we had no borrowings outstanding under the credit facility and the Company was in compliance with all terms and covenants of the Loan Agreement.

On March 11, 2020, the Company entered into Amendment No.

1 to the Loan Agreement, which amended the existing agreement.

The amendment extends the maturity of the facility to March 11, 2025, provides maximum revolving loans equal to the lesser of $1.0 billion or a percentage of eligible owned inventory and receivables, contains a $50 million sub-facility for letters of credit and allows the Company to increase the revolving facility by an additional $100 million.

Outstanding borrowings bear interest, at the Company’s election, at either a base rate plus a margin of 0% to 0.125% or the London Interbank Offered Rate plus a margin of 1.125% to 1.250%, with such margins based on the Company’s borrowing availability, and the unused line fee is 0.20% per annum.

As of January 30, 2021 and February 1, 2020, we had no borrowings outstanding under the credit facility and we were in compliance with all terms and covenants of the Loan Agreement.

Our business is subject to seasonal fluctuation.

Significant portions of our net sales and profits are realized during the fourth quarter of the fiscal year due to the holiday selling season.

To a lesser extent, our business is also affected by Mother’s Day and Valentine’s Day season.

To a lesser extent, our business is also affected by Mother’s Day and Valentine’s Day.

Any decrease in sales during these higher sales volume periods could have an adverse effect on our business, financial condition, or operating results for the entire fiscal year.

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Off-balance sheet arrangements

As of February 1, 2020, we have not entered into any “off-balance sheet” arrangements, as that term is described by the SEC.

As of January 30, 2021, we have not entered into any “off-balance sheet” arrangements, as that term is described by the SEC.

We do, however, have off-balance sheet purchase obligations incurred in the ordinary course of business as indicated within the contractual obligations table below.

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The following table summarizes our contractual arrangements and the timing and effect that such commitments are expected to have on our liquidity and cash flows in future periods.

The table below includes obligations for executed agreements for which we do not yet have the right to control the use of the property as of February 1, 2020:

The table below includes obligations for executed agreements for which we do not yet have the right to control the use of the property as of January 30, 2021:

(In thousands)

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(1) These amounts are for our undiscounted lease obligations recorded in our consolidated balance sheets, as operating lease liabilities.

For additional information about our leases, see Note 8 to our consolidated financial statements, “Leases.”

(2) The unrecognized tax benefit of $3.5 million as of February 1, 2020 is excluded due to uncertainty regarding the realization and timing of the related future cash flows, if any.

Also included are legally binding minimum lease payments for leases signed but not yet commenced of $75,782, which are excluded from operating lease liabilities shown on our consolidated balance sheets.

(2) The unrecognized tax benefit of $2.8 million as of January 30, 2021 is excluded due to uncertainty regarding the realization and timing of the related future cash flows, if any.

Purchase obligations reflect legally binding agreements entered into by the Company to purchase goods or services.

Excluded from our purchase obligations are normal purchases and contracts entered into in the ordinary course of

The amount of purchase obligations relates to commitments made to a third party for products and services for the new fast fulfillment center expected to open in fiscal 2021, advertising, and other goods and service contracts entered into as of February 1, 2020.

Excluded from our purchase obligations are normal purchases and contracts entered into in the ordinary course of business.

The amount of purchase obligations relates to commitments made to third-parties for products and services and other goods and service contracts entered into as of January 30, 2021.

Critical accounting policies and estimates

Management’s discussion and analysis of financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with U.S.

generally accepted accounting principles (GAAP).

Management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S.

generally accepted accounting principles.

The preparation of these financial statements required the use of estimates and judgments that affect the reported amounts of our assets, liabilities, revenues, and expenses.

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Cost is determined using the moving average cost method and includes costs incurred to purchase and distribute goods as well as related vendor allowances including co-op advertising, markdowns, and volume discounts.

We record valuation adjustments to our inventories if the cost of a specific product on hand exceeds the amount we expect to realize from the ultimate sale or disposal of the inventory.

We record valuation adjustments to our inventories if the cost of a specific product on hand exceeds the amount we expect to realize from the ultimate sale or

disposal of the inventory.

These estimates are based on management’s judgment regarding future demand, age of inventory, and analysis of historical experience.

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Adjustments to earnings resulting from revisions to management’s estimates of the inventory reserves have been insignificant during fiscal 2020, 2019 and 2018.

An increase or decrease in the lower of cost or market (net realizable value) reserve of 10% would not have a material impact on our pre-tax income for fiscal 2019.

An increase or decrease in the shrink rate included in the shrink reserve calculation of 10% would not have a material impact on our pre-tax income for fiscal 2019.

An increase or decrease in the lower of cost or market (net realizable value) reserve of 10% would not have a material impact on our operating income for fiscal 2020.

An increase or decrease in the shrink rate included in the shrink reserve calculation of 10% would not have a material impact on our operating income for fiscal 2020.

Vendor allowances

The majority of cash consideration received from a vendor is considered to be a reduction of the cost of the related products and is reflected in cost of sales in our consolidated statements of income as the related products are sold unless it is in exchange for an asset or service or a reimbursement of a specific, incremental, identifiable cost incurred by the Company in selling the vendors’ products.

The majority of cash consideration received from a vendor is considered to be a reduction of the cost of the related products and is reflected in cost of sales in our consolidated statements of operations as the related products are sold unless it is in exchange for an asset or service or a reimbursement of a specific, incremental, identifiable cost incurred by the Company in selling the vendors’ products.

We estimate the amount recorded as a reduction of inventory at the end of each period based on a detailed analysis of inventory turns and management’s analysis of the facts and circumstances of the various contractual agreements with vendors.

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We do not believe there is a reasonable likelihood there will be a material change in the future estimates or assumptions we use to calculate our reduction of inventory.

An increase or decrease in inventory turns of five basis points would not have a material impact on our pre-tax income for fiscal 2019.

An increase or decrease in inventory turns of five basis points would not have a material impact on our operating income for fiscal 2020.

Impairment of long-lived tangible assets

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Significant estimates are used in determining future operating results of each store over its remaining lease term.

impairment loss would be recorded if the carrying amount of the long-lived asset exceeds its fair value.

An impairment loss would be recorded if the carrying amount of the long-lived asset exceeds its fair value.

We do not believe that there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to calculate our impairment charges.

No significant impairment charges were recognized in fiscal 2019, fiscal 2018, or fiscal 2017.

During fiscal 2020, we recognized $72.5 million of impairment of long-lived tangible and right-of-use assets which consisted of $41.9 million due to impairment analysis which indicated that the carrying values of certain long-lived assets exceeded their respective fair values, $19.6 million related to the suspension of the planned expansion to Canada, and $11.0 million related to the permanent closure of 19 stores.

No significant impairment charges were recognized in fiscal 2019 or fiscal 2018.

Loyalty program

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Adjustments to earnings resulting from revisions to management’s estimates of the redemption rates have been insignificant during fiscal 2020, 2019 and 2018.

An increase or decrease in the estimated redemption rate of 5% would not have a material impact on our pre-tax income in fiscal 2019.

An increase or decrease in the estimated redemption rate of 5% would not have a material impact on our operating income in fiscal 2020.

We are subject to income taxes in the United States.

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Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are anticipated to be recovered or settled.

The effect on deferred taxes of a change in income tax rates is recognized in the consolidated statements of income in the period of enactment.

The effect on deferred taxes of a change in income tax rates is recognized in the consolidated statements of operations in the period of enactment.

A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets to the amount expected to be realized unless it is more-likely-than-not that such assets will be realized in full.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis