Ulta Beauty, Inc. 10-Q

Item 1. Financial Statements Ulta Beauty, Inc. Consolidated Balance Sheets ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ May 1, ​ January 30, ​ May 2, (In thousands, except per share data) 2021 2021 2020 Assets ​ ​ (Unaudited) ​ ​ ​ ​ ​ (Unaudited) Current assets: ​ ​ ​ ​ ​ ​ ​ ​ ​ Cash and cash equivalents ​ $ 947,456 ​ $ 1,046,051 ​ $ 1,043,540 Short-term investments ​ ​ — ​ ​ — ​ ​ 110,000 Receivables, net ​ ​ 154,342 ​ ​ 193,109 ​ ​ 88,691 Merchandise inventories, net ​ ​ 1,353,565 ​ ​ 1,168,215 ​ ​ 1,340,566 Prepaid expenses and other current assets ​ ​ 108,393 ​ ​ 107,402 ​ ​ 97,041 Prepaid income taxes ​ ​ — ​ ​ — ​ ​ 48,982 Total current assets ​ ​ 2,563,756 ​ ​ 2,514,777 ​ ​ 2,728,820 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Property and equipment, net ​ ​ 960,440 ​ ​ 995,795 ​ ​ 1,148,341 Operating lease assets ​ ​ 1,487,616 ​ ​ 1,504,614 ​ ​ 1,583,490 Goodwill ​ ​ 10,870 ​ ​ 10,870 ​ ​ 10,870 Other intangible assets, net ​ ​ 2,233 ​ ​ 2,465 ​ ​ 3,159 Deferred compensation plan assets ​ ​ 34,279 ​ ​ 33,223 ​ ​ 25,388 Other long-term assets ​ ​ 28,350 ​ ​ 28,225 ​ ​ 30,483 Total assets ​ $ 5,087,544 ​ $ 5,089,969 ​ $ 5,530,551 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Liabilities and stockholders’ equity ​ ​ ​ ​ ​ ​ ​ ​ ​ Current liabilities: ​ ​ ​ ​ ​ ​ ​ ​ ​ Accounts payable ​ $ 552,837 ​ $ 477,052 ​ $ 466,043 Accrued liabilities ​ ​ 322,676 ​ ​ 296,334 ​ ​ 173,310 Deferred revenue ​ ​ 270,090 ​ ​ 274,383 ​ ​ 216,330 Current operating lease liabilities ​ ​ 263,200 ​ ​ 253,415 ​ ​ 240,496 Accrued income taxes ​ ​ 113,960 ​ ​ 42,529 ​ ​ — Total current liabilities ​ ​ 1,522,763 ​ ​ 1,343,713 ​ ​ 1,096,179 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Non-current operating lease liabilities ​ ​ 1,613,309 ​ ​ 1,643,386 ​ ​ 1,748,245 Long-term debt ​ ​ — ​ ​ — ​ ​ 800,000 Deferred income taxes ​ ​ 66,483 ​ ​ 65,359 ​ ​ 95,276 Other long-term liabilities ​ ​ 40,272 ​ ​ 37,962 ​ ​ 36,892 Total liabilities ​ ​ 3,242,827 ​ ​ 3,090,420 ​ ​ 3,776,592 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Commitments and contingencies (Note 7) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Stockholders' equity: ​ ​ ​ ​ ​ ​ ​ ​ ​ Common stock, $ 0.01 par value, 400,000 shares authorized; 55,803 , 56,952 and 57,003 shares issued; 55,090 , 56,260 and 56,312 shares outstanding; at May 1, 2021, January 30, 2021, and May 2, 2020, respectively ​ ​ 558 ​ ​ 569 ​ ​ 570 Treasury stock-common, at cost ​ ​ ( 44,567 ) ​ ​ ( 37,801 ) ​ ​ ( 37,450 ) Additional paid-in capital ​ ​ 861,312 ​ ​ 847,303 ​ ​ 813,924 Retained earnings ​ ​ 1,027,414 ​ ​ 1,189,422 ​ ​ 976,990 Accumulated other comprehensive income (loss) ​ ​ — ​ ​ 56 ​ ​ ( 75 ) Total stockholders’ equity ​ ​ 1,844,717 ​ ​ 1,999,549 ​ ​ 1,753,959 Total liabilities and stockholders’ equity ​ $ 5,087,544 ​ $ 5,089,969 ​ $ 5,530,551 ​ See accompanying notes to consolidated financial statements. 3 Table of Contents Ulta Beauty, Inc. Consolidated Statements of Operations (Unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 13 Weeks Ended ​ ​ ​ May 1, ​ May 2, ​ (In thousands, except per share data) 2021 ​ 2020 ​ Net sales ​ $ 1,938,519 ​ $ 1,173,210 ​ Cost of sales ​ ​ 1,184,731 ​ ​ 869,605 ​ Gross profit ​ ​ 753,788 ​ ​ 303,605 ​ ​ ​ ​ ​ ​ ​ ​ ​ Selling, general and administrative expenses ​ ​ 443,875 ​ ​ 380,912 ​ Impairment costs ​ ​ — ​ ​ 19,542 ​ Pre-opening expenses ​ ​ 4,589 ​ ​ 4,635 ​ Operating income (loss) ​ ​ 305,324 ​ ​ ( 101,484 ) ​ Interest expense, net ​ ​ 358 ​ ​ 1,272 ​ Income (loss) before income taxes ​ ​ 304,966 ​ ​ ( 102,756 ) ​ Income tax expense (benefit) ​ ​ 74,677 ​ ​ ( 24,247 ) ​ Net income (loss) ​ $ 230,289 ​ $ ( 78,509 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ Net income (loss) per common share: ​ ​ ​ ​ ​ ​ ​ Basic ​ $ 4.13 ​ $ ( 1.39 ) ​ Diluted ​ $ 4.10 ​ $ ( 1.39 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted average common shares outstanding: ​ ​ ​ ​ ​ ​ ​ Basic ​ ​ 55,795 ​ ​ 56,419 ​ Diluted ​ ​ 56,172 ​ ​ 56,419 ​ ​ ​ See accompanying notes to consolidated financial statements. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 4 Table of Contents Ulta Beauty, Inc. Consolidated Statements of Comprehensive Income (Loss) (Unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ 13 Weeks Ended ​ ​ May 1, ​ May 2, (In thousands) 2021 2020 Net income (loss) $ 230,289 ​ $ ( 78,509 ) Other comprehensive income (loss): ​ ​ ​ ​ ​ ​ Foreign currency translation adjustments ​ ​ — ​ ​ ( 75 ) Comprehensive income (loss) ​ $ 230,289 ​ $ ( 78,584 ) ​ See accompanying notes to consolidated financial statements. ​ ​ ​ ​ ​ ​ 5 Table of Contents Ulta Beauty, Inc. Consolidated Statements of Cash Flows (Unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 13 Weeks Ended ​ ​ ​ May 1, ​ May 2, ​ (In thousands) 2021 2020 ​ Operating activities ​ ​ ​ ​ ​ ​ ​ Net income (loss) ​ $ 230,289 ​ $ ( 78,509 ) ​ Adjustments to reconcile net income (loss) to net cash provided by operating activities: ​ ​ ​ ​ ​ ​ Depreciation and amortization ​ ​ 70,599 ​ ​ 76,626 ​ Non-cash lease expense ​ ​ 68,881 ​ ​ 70,863 ​ Long-lived asset impairment charge ​ ​ — ​ ​ 19,542 ​ Deferred income taxes ​ ​ 1,124 ​ ​ 5,909 ​ Stock-based compensation expense ​ ​ 8,978 ​ ​ 6,182 ​ Loss on disposal of property and equipment ​ ​ 1,089 ​ ​ 1,521 ​ Change in operating assets and liabilities: ​ ​ ​ ​ ​ ​ ​ Receivables ​ ​ 38,767 ​ ​ 50,646 ​ Merchandise inventories ​ ​ ( 185,350 ) ​ ​ ( 46,865 ) ​ Prepaid expenses and other current assets ​ ​ ( 991 ) ​ ​ 6,526 ​ Income taxes ​ ​ 71,431 ​ ​ ( 32,595 ) ​ Accounts payable ​ ​ 76,580 ​ ​ 46,965 ​ Accrued liabilities ​ ​ 23,209 ​ ​ ( 63,927 ) ​ Deferred revenue ​ ​ ( 4,293 ) ​ ​ ( 21,205 ) ​ Operating lease liabilities ​ ​ ( 72,175 ) ​ ​ ( 68,976 ) ​ Other assets and liabilities ​ ​ 1,929 ​ ​ 2,979 ​ Net cash provided by (used in) operating activities ​ ​ 330,067 ​ ​ ( 24,318 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ Investing activities ​ ​ ​ ​ ​ ​ ​ Capital expenditures ​ ​ ( 34,563 ) ​ ​ ( 41,474 ) ​ Purchases of equity investments ​ ​ — ​ ​ ( 5,386 ) ​ Net cash used in investing activities ​ ​ ( 34,563 ) ​ ​ ( 46,860 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ Financing activities ​ ​ ​ ​ ​ ​ ​ Proceeds from long-term debt ​ ​ — ​ ​ 800,000 ​ Repurchase of common shares ​ ​ ( 392,309 ) ​ ​ ( 72,981 ) ​ Stock options exercised ​ ​ 5,032 ​ ​ 250 ​ Purchase of treasury shares ​ ​ ( 6,766 ) ​ ​ ( 3,002 ) ​ Debt issuance costs ​ ​ — ​ ​ ( 1,799 ) ​ Net cash provided by (used in) financing activities ​ ​ ( 394,043 ) ​ ​ 722,468 ​ ​ ​ ​ ​ ​ ​ ​ ​ Effect of exchange rate changes on cash and cash equivalents ​ ​ ( 56 ) ​ ​ ( 75 ) ​ Net increase (decrease) in cash and cash equivalents ​ ​ ( 98,595 ) ​ ​ 651,215 ​ Cash and cash equivalents at beginning of period ​ ​ 1,046,051 ​ ​ 392,325 ​ Cash and cash equivalents at end of period ​ $ 947,456 ​ $ 1,043,540 ​ ​ ​ ​ ​ ​ ​ ​ ​ Supplemental information ​ ​ ​ ​ ​ ​ ​ Cash paid for interest ​ $ 526 ​ $ 1,688 ​ Income taxes paid, net of refunds ​ 1,725 ​ ​ 5,636 ​ Non-cash capital expenditures ​ ​ 22,825 ​ ​ 23,119 ​ See accompanying notes to consolidated financial statements. ​ 6 Table of Contents Ulta Beauty, Inc. Consolidated Statements of Stockholders’ Equity (Unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Treasury - ​ ​ ​ ​ ​ ​ Accumulated ​ ​ ​ ​ Common Stock ​ Common Stock ​ Additional ​ ​ ​ Other ​ Total ​ ​ Issued ​ ​ ​ Treasury ​ ​ ​ Paid-In ​ Retained ​ Comprehensive ​ Stockholders' (In thousands) Shares Amount Shares Amount Capital Earnings Income (Loss) Equity Balance – February 1, 2020 ​ 57,285 ​ $ 573 ​ ( 676 ) ​ $ ( 34,448 ) ​ $ 807,492 ​ $ 1,128,477 ​ $ — ​ $ 1,902,094 Net loss ​ — ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ ( 78,509 ) ​ ​ — ​ ​ ( 78,509 ) Stock-based compensation ​ — ​ ​ — ​ — ​ ​ — ​ ​ 6,182 ​ ​ — ​ ​ — ​ ​ 6,182 Foreign currency translation adjustments ​ — ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 75 ) ​ ​ ( 75 ) Stock options exercised and other awards ​ 45 ​ ​ — ​ — ​ ​ — ​ ​ 250 ​ ​ — ​ ​ — ​ ​ 250 Purchase of treasury shares ​ — ​ ​ — ​ ( 15 ) ​ ​ ( 3,002 ) ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 3,002 ) Repurchase of common shares ​ ( 327 ) ​ ​ ( 3 ) ​ — ​ ​ — ​ ​ — ​ ​ ( 72,978 ) ​ ​ — ​ ​ ( 72,981 ) Balance – May 2, 2020 ​ 57,003 ​ $ 570 ​ ( 691 ) ​ $ ( 37,450 ) ​ $ 813,924 ​ $ 976,990 ​ $ ( 75 ) ​ $ 1,753,959 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Balance – January 30, 2021 ​ 56,952 ​ $ 569 ​ ( 692 ) ​ $ ( 37,801 ) ​ $ 847,303 ​ $ 1,189,422 ​ $ 56 ​ $ 1,999,549 Net income ​ — ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ 230,289 ​ ​ — ​ ​ 230,289 Stock-based compensation ​ — ​ ​ — ​ — ​ ​ — ​ ​ 8,978 ​ ​ — ​ ​ — ​ ​ 8,978 Foreign currency translation adjustments ​ — ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 56 ) ​ ​ ( 56 ) Stock options exercised and other awards ​ 94 ​ ​ 1 ​ — ​ ​ — ​ ​ 5,031 ​ ​ — ​ ​ — ​ ​ 5,032 Purchase of treasury shares ​ — ​ ​ — ​ ( 21 ) ​ ​ ( 6,766 ) ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 6,766 ) Repurchase of common shares ​ ( 1,243 ) ​ ​ ( 12 ) ​ — ​ ​ — ​ ​ — ​ ​ ( 392,297 ) ​ ​ — ​ ​ ( 392,309 ) Balance – May 1, 2021 ​ 55,803 ​ $ 558 ​ ( 713 ) ​ $ ( 44,567 ) ​ $ 861,312 ​ $ 1,027,414 ​ $ — ​ $ 1,844,717 ​ See accompanying notes to consolidated financial statements. ​ ​ 7 Table of Contents Ulta Beauty, Inc. Notes to Consolidated Financial Statements (In thousands, except per share and store count data) (Unaudited) 1. Business and basis of presentation On January 29, 2017, Ulta Salon, Cosmetics & Fragrance, Inc. implemented a holding company reorganization. Pursuant to the reorganization, Ulta Beauty, Inc., which was incorporated as a Delaware corporation in December 2016, became the successor to Ulta Salon, Cosmetics & Fragrance, Inc., the former publicly-traded company and now a wholly owned subsidiary of Ulta Beauty, Inc. As used in these notes and throughout this Quarterly Report on Form 10-Q, all references to “we,” “us,” “our,” “Ulta Beauty,” or the “Company” refer to Ulta Beauty, Inc. and its consolidated subsidiaries. The Company was originally founded in 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 May 1, 2021, the Company operated 1,290 stores across 50 states, as shown in the table below. ​ ​ ​ ​ ​ ​ ​ ​ ​ Number of ​ ​ ​ Number of Location stores Location stores Alabama ​ 23 ​ Montana ​ 6 Alaska ​ 3 ​ Nebraska ​ 5 Arizona ​ 30 ​ Nevada ​ 15 Arkansas ​ 10 ​ New Hampshire ​ 8 California ​ 161 ​ New Jersey ​ 43 Colorado ​ 26 ​ New Mexico ​ 7 Connecticut ​ 18 ​ New York ​ 50 Delaware ​ 3 ​ North Carolina ​ 36 Florida ​ 90 ​ North Dakota ​ 3 Georgia ​ 39 ​ Ohio ​ 45 Hawaii ​ 4 ​ Oklahoma ​ 21 Idaho ​ 9 ​ Oregon ​ 17 Illinois ​ 55 ​ Pennsylvania ​ 44 Indiana ​ 24 ​ Rhode Island ​ 3 Iowa ​ 11 ​ South Carolina ​ 22 Kansas ​ 13 ​ South Dakota ​ 3 Kentucky ​ 15 ​ Tennessee ​ 27 Louisiana ​ 18 ​ Texas ​ 118 Maine ​ 3 ​ Utah ​ 14 Maryland ​ 27 ​ Vermont ​ 1 Massachusetts ​ 23 ​ Virginia ​ 30 Michigan ​ 49 ​ Washington ​ 34 Minnesota ​ 19 ​ West Virginia ​ 7 Mississippi ​ 10 ​ Wisconsin ​ 20 Missouri ​ 25 ​ Wyoming ​ 3 ​ ​ ​ ​ Total ​ 1,290 The accompanying unaudited consolidated financial statements and related notes have been prepared in accordance with U.S. generally accepted accounting principles 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 financial statements were prepared on a consolidated basis to include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts, transactions, and unrealized profit were eliminated in consolidation. In the opinion of management, the accompanying unaudited consolidated financial statements reflect all adjustments, which are of a 8 Table of Contents 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, with significant portions of net sales and net income being realized during the fourth quarter of the fiscal year due to the holiday selling season. The results for the 13 weeks ended May 1, 2021 are not necessarily indicative of the results to be expected for the fiscal year ending January 29, 2022, or for any other future interim period or for any future year, in particular as a result of the uncertainty around the continuing effects of the COVID-19 pandemic on future periods. These unaudited 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 January 30, 2021. All amounts are stated in thousands, with the exception of per share amounts and number of stores. 2. Summary of significant accounting policies Information regarding significant accounting policies is contained in Note 2, “Summary of significant accounting policies,” to the consolidated financial statements in the Annual Report on Form 10-K for the year ended January 30, 2021. Presented below and in the following notes is supplemental information that should be read in conjunction with “Notes to Consolidated 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 first quarter in fiscal 2021 and 2020 ended on May 1, 2021 and May 2, 2020, respectively. Use of estimates The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the accounting period. Actual results could differ from those estimates. The Company considers its accounting policies relating to inventory valuations, vendor allowances, impairment of long-lived tangible and right-of-use assets, loyalty program and income taxes to be the most significant accounting policies that involve management estimates and judgments. Significant changes, if any, in those estimates and assumptions resulting from continuing changes in the economic environment, including those related to the impacts of the COVID-19 pandemic, will be reflected in the consolidated financial statements in future periods. Impairment of long-lived tangible and right-of-use assets The asset group is defined as the lowest level for which identifiable cash flows are available and largely independent of the cash flows of other groups of assets. The asset group identified is at the store level and includes both property and equipment and operating lease assets. Significant estimates are used in determining future cash flows of each store over its remaining lease term including our expectations of future projected cash flows including revenues and operating expenses. An impairment loss is recorded if the carrying amount of the long-lived asset exceeds its fair value. Long-lived tangible and right-of-use assets are evaluated for indicators of impairment quarterly or when events or changes in circumstances indicate that their carrying amounts may not be recoverable. An undiscounted cash flow analysis is performed over the asset group. Asset groups are written down only to the extent that their carrying value exceeds their respective fair value. Fair values of the asset group are determined by discounting the cash flows at a rate that approximates the cost of capital of a market participant. Management’s forecast of future cash flows is based on the income approach. The fair value of individual operating lease assets is determined under the market approach using estimated market rent assessments based on broker quotes. 9 Table of Contents The determination of fair value under the income approach requires assumptions including forecasts of future cash flows (such as revenue growth rates and operating expenses) and selection of a market-based discount rate. Estimates of market rent are based on non-binding broker quotes. As these inputs are unobservable, they are classified as Level 3 inputs under the fair value hierarchy (see Note 9, Fair value measurements”). If actual results are not consistent with estimates and assumptions used in estimating future cash flows and asset fair values, there may be exposure to additional impairment losses in a future period (see Note 4, “Impairment costs”). CARES Act On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was enacted. The CARES Act, among other things, includes provisions relating to refundable payroll taxes, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. The most significant relief measures which the Company qualifies for are the employee retention credit, payroll tax deferral, and technical corrections to tax depreciation. The Company recognizes government grants for which there is a reasonable assurance of compliance with grant conditions and receipt of credits. The Company believes there is a reasonable assurance that it will comply with the relevant conditions of the employee retention credit provision of the CARES Act and that it will receive the credit. The Company will continue to assess the treatment of the CARES Act to the extent additional guidance and regulations are issued, the further applicability of the CARES Act, and the potential impacts on the business. Employee retention credit (ERC) and payroll tax deferral. The ERC allows for a refundable tax credit against certain employment taxes equal to 50% of the first ten thousand dollars in qualified wages paid to each employee commencing on March 13, 2020 through January 1, 2021 and 70% of the first ten thousand dollars, per quarter, in qualified wages paid to each employee commencing on January 1, 2021 through June 30, 2021. To be eligible, the Company must (i) have had operations fully or partially suspended because of a governmental order, or (ii) have had gross receipts decline by more than 50% in a calendar quarter in fiscal 2020 or 20% in a calendar quarter in fiscal 2021, when compared to the same quarter in 2019. Qualified wages are limited to wages paid to employees who were not providing services due to the COVID-19 pandemic. During the 13 weeks ended May 1, 2021, there was $ 2,339 related to the ERC recognized as a reduction of the associated costs within selling, general and administrative expenses on the consolidated statements of operations and within accounts receivable, net on the consolidated balance sheets. The receivable for the ERC was $ 54,744 as of May 1, 2021. There were no amounts related to the ERC recognized during the 13 weeks ended May 2, 2020, and there was no receivable for the ERC as of May 2, 2020. Additionally, the CARES Act contains provisions for the deferral of the employer portion of social security taxes incurred through the end of calendar 2020. As of May 1, 2021, there was $ 43,845 of social security tax payments deferred, of which 50% are required to be remitted by December 2021 and the remaining 50% by December 2022. The deferred amounts are recorded within accrued liabilities on the consolidated balance sheets. There were no social security tax payments deferred as of May 2, 2020. Recently adopted accounting pronouncements Taxes – Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. In December 2019, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2019-12, Income Taxes – Simplifying the Accounting for Income Taxes. The guidance removes certain exceptions for recognizing deferred taxes for equity method investments, performing intraperiod allocation, and calculating income taxes in interim periods. The ASU also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for goodwill and allocating taxes to members of a consolidated group, among others. This guidance is effective for interim and annual reporting periods beginning after December 15, 2020. Early adoption of the standard is permitted, including adoption in interim or annual periods for which financial statements have not yet been issued. The transition requirements are dependent upon each amendment within this update and will be applied either prospectively or retrospectively. The Company adopted the 10 Table of Contents new guidance as of January 31, 2021, and its adoption had no impact on the Company’s consolidated financial position, results of operations, or cash flows. ​ 3. Revenue Net sales include retail stores and e-commerce merchandise sales as well as salon services and other revenue. 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. Disaggregated revenue ​ The following table sets forth the approximate percentage of net sales by primary category: ​ ​ ​ ​ ​ ​ ​ ​ ​ 13 Weeks Ended ​ ​ May 1, ​ May 2, (Percentage of net sales) ​ 2021 ​ 2020 Cosmetics (1) ​ 45 % ​ 50 % Skincare ​ 19 % ​ 17 % Haircare products and styling tools ​ 19 % ​ 18 % Fragrance and bath ​ 11 % ​ 7 % Services ​ 3 % ​ 4 % Accessories and other (1) ​ 3 % ​ 4 % ​ ​ 100 % ​ 100 % (1) Certain sales departments were reclassified between categories in the prior year to conform to current year presentation. ​ Deferred revenue ​ Deferred revenue primarily represents contract liabilities for the obligation to transfer additional goods or services to a guest for which the Company has received consideration, such as unredeemed Ultamate Rewards loyalty points and unredeemed Ulta Beauty gift cards. In addition, breakage on gift cards is recognized proportionately as redemption occurs. ​ The following table provides a summary of the changes included in deferred revenue during the 13 weeks ended May 1, 2021 and May 2, 2020: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ May 1, ​ May 2, (In thousands) ​ 2021 2020 Beginning balance ​ $ 269,032 ​ $ 230,011 Additions to contract liabilities (1) ​ ​ 97,681 ​ ​ 41,636 Deductions to contract liabilities (2) ​ ​ ( 113,541 ) ​ ​ ( 64,994 ) Ending balance ​ $ 253,172 ​ $ 206,653 (1) Loyalty points and gift cards issued in the current period but not redeemed or expired. (2) Revenue recognized in the current period related to the beginning liability . Other amounts included in deferred revenue were $ 16,918 and $ 9,677 at May 1, 2021 and May 2, 2020, respectively. ​ 11 Table of Contents 4. Impairment costs As a result of the COVID-19 pandemic, the Company experienced lower than projected revenues and identified indicators of impairment for certain retail stores during the 13 weeks ended May 2, 2020. The Company’s analysis indicated that the carrying values of certain long-lived tangible and right-of-use assets exceeded their respective fair values. As a result, impairment costs of $ 19,542 related to certain retail stores were recognized during the 13 weeks ended May 2, 2020. These impairment costs were primarily driven by lower than projected revenues, lower market rate assessments, and the effect of temporary store closures as a result of the COVID-19 pandemic. There were no impairment costs recognized during the 13 weeks ended May 1, 2021. 5. Goodwill and other intangible assets Goodwill, which represents the excess of cost over the fair value of net assets acquired, was $ 10,870 at May 1, 2021, January 30, 2021, and May 2, 2020. No additional goodwill was recognized during the 13 weeks ended May 1, 2021. The recoverability of goodwill is reviewed annually during the fourth quarter or more frequently if an event occurs or circumstances change that would indicate that impairment may exist. Other definite-lived intangible assets are amortized over their useful lives. The recoverability of intangible assets is reviewed whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable. ​ 6. Leases The Company leases retail stores, distribution centers, fast fulfillment centers, corporate offices, and certain equipment under non-cancelable operating leases with various expiration dates through 2033. All leases are classified as operating leases and generally have initial lease terms of 10 years and, when determined applicable, include renewal options under substantially the same terms and conditions as the original leases. Leases do not contain any material residual value guarantees or material restrictive covenants. Lease cost The majority of operating lease cost relates to retail stores, distribution centers, and fast fulfillment centers and is classified within cost of sales. Operating lease cost for corporate offices is classified within selling, general and administrative expenses. Operating lease cost from the control date through store opening date is classified within pre-opening expenses. Operating lease cost was $ 78,736 and $ 77,533 for the 13 weeks ended May 1, 2021 and May 2, 2020, respectively. Other information The following table presents supplemental disclosures of cash flow information related to operating leases: ​ ​ ​ ​ ​ ​ ​ ​ 13 Weeks Ended ​ ​ May 1, ​ May 2, (In thousands) 2021 ​ 2020 Cash paid for operating lease liabilities (1) ​ $ 90,227 ​ $ 87,434 Operating lease assets obtained in exchange for operating lease liabilities (non-cash) ​ ​ 51,883 ​ ​ 119,371 (1) Excludes $ 7,986 and $ 12,075 related to cash received for tenant incentives for the 13 weeks ended May 1, 2021 and May 2, 2020, respectively. ​ 7. Commitments and contingencies The Company is involved in various legal proceedings that are incidental to the conduct of the business including both class action and single plaintiff litigation. In the opinion of management, the amount of any liability with respect to these 12 Table of Contents proceedings, either individually or in the aggregate, will not have a material adverse effect on the consolidated financial position, results of operations or cash flows. 8. Debt On March 11, 2020, the Company 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; JPMorgan Chase Bank, N.A., as Syndication Agent and a Lender; PNC Bank, National Association, as Documentation Agent and a Lender; and the other lenders party thereto. The Loan Agreement matures on March 11, 2025, provides maximum revolving loans equal to the lesser of $ 1,000,000 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 $ 50,000 subfacility for letters of credit and allows the Company to increase the revolving facility by an additional $ 100,000 , 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 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 May 1, 2021 and January 30, 2021, there were no borrowings outstanding under the credit facility. As of May 2, 2020, there was $ 800,000 outstanding under the credit facility and the weighted average interest rate was 1.94 %. As of May 1, 2021, the Company was in compliance with all terms and covenants of the Loan Agreement. 9. Fair value measurements The carrying value of cash and cash equivalents, short-term investments, accounts receivable, and accounts payable approximates their estimated fair values due to the short maturities of these instruments. The carrying value of long-term debt also approximates its fair value. 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 May 1, 2021, January 30, 2021, and May 2, 2020, there were liabilities related to the non-qualified deferred compensation plan included in other long-term liabilities on the consolidated balance sheets of $ 35,449 , $ 32,909 , and $ 23,330 , respectively. The liabilities are categorized as Level 2 as they are based on third-party reported values, which are based primarily on quoted market prices of underlying assets of the funds within the plan. ​ Some assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances. These assets can include long-lived assets and goodwill that are reduced to fair value when impaired. Assets that are written down to fair value when impaired are not subsequently adjusted to fair value unless further impairment occurs. ​ ​ ​ 13 Table of Contents 10. Investments Short-term investments typically consist of certificates of deposit and are carried at cost, which approximates fair value. There were no short-term investments as of May 1, 2021 and January 30, 2021. Short-term investments were $ 110,000 as of May 2, 2020. Investments in renewable energy projects are accounted for under the equity method of accounting. The balance of these investments was $ 3,247 , $ 3,174 , and $ 6,437 as of May 1, 2021, January 30, 2021, and May 2, 2020, respectively, and is included in other long-term assets on the consolidated balance sheets. The Company did not contribute capital or receive investment tax credits during the 13 weeks ended May 1, 2021. The Company contributed capital of $ 5,386 and received distributions including $ 1,250 of investment tax credits during the 13 weeks ended May 2, 2020. 11. Stock-based compensation Stock-based compensation expense is measured on the grant date based on the fair value of the award. Stock-based compensation expense is recognized on a straight-line basis over the requisite service period for awards expected to vest. The estimated grant date fair value of stock options was determined using a Black-Scholes valuation model using the following weighted-average assumptions for the periods indicated: ​ ​ ​ ​ ​ ​ ​ ​ ​ 13 Weeks Ended ​ ​ ​ May 1, ​ May 2, ​ ​ 2021 2020 ​ Volatility rate 46.9 % ​ 43.0 % ​ Average risk-free interest rate 0.4 % ​ 0.3 % ​ Average expected life (in years) 3.9 3.4 ​ Dividend yield None None ​ ​ The Company granted 61 and 248 stock options during the 13 weeks ended May 1, 2021 and May 2, 2020, respectively. Stock-based compensation expense for stock options was $ 2,897 and $ 2,475 for the 13 weeks ended May 1, 2021 and May 2, 2020, respectively. The weighted-average grant date fair value of these stock options was $ 109.72 and $ 54.40 for the 13 weeks ended May 1, 2021 and May 2, 2020, respectively. At May 1, 2021, there was approximately $ 20,470 of unrecognized stock-based compensation expense related to unvested stock options. There were 52 and 152 restricted stock units issued during the 13 weeks ended May 1, 2021 and May 2, 2020, respectively. Stock-based compensation expense for restricted stock units was $ 4,835 and $ 4,187 for the 13 weeks ended May 1, 2021 and May 2, 2020, respectively. At May 1, 2021, there was approximately $ 36,761 of unrecognized stock-based compensation expense related to restricted stock units. There were 46 performance-based restricted stock units issued during the 13 weeks ended May 1, 2021. There were no performance-based restricted stock units issued during the 13 weeks ended May 2, 2020. Stock-based compensation expense for performance-based restricted stock units was $ 1,246 for the 13 weeks ended May 1, 2021. Stock-based compensation benefit for performance-based restricted stock units was $ 480 for the 13 weeks ended May 2, 2020. At May 1, 2021, there was approximately $ 19,721 of unrecognized stock-based compensation expense related to performance-based restricted stock units. 12. Income taxes Income tax expense reflects the federal statutory tax rate and the weighted average state statutory tax rate for the states in which the Company operates stores. Income tax expense of $ 74,677 for the 13 weeks ended May 1, 2021 represents an effective tax rate of 24.5 %, compared to $ 24,247 of income tax benefit representing an effective tax rate of 23.6 % for the 13 weeks ended May 2, 2020. The higher effective tax rate is primarily due to a decrease in the benefit of state tax credits compared to the first quarter of fiscal 2020 as a result of an increase in pretax income. 14 Table of Contents 13. Net income (loss) per common share The following is a reconciliation of net income (loss) and the number of shares of common stock used in the computation of net income (loss) per basic and diluted common share: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 13 Weeks Ended ​ ​ May 1, ​ May 2, (In thousands, except per share data) 2021 2020 Numerator: ​ ​ ​ ​ ​ ​ Net income (loss) $ 230,289 ​ $ ( 78,509 ) ​ ​ ​ ​ ​ ​ ​ Denominator: ​ ​ ​ ​ ​ ​ Weighted-average common shares – Basic ​ ​ 55,795 ​ ​ 56,419 Dilutive effect of stock options and non-vested stock ​ ​ 377 ​ ​ — Weighted-average common shares – Diluted ​ ​ 56,172 ​ ​ 56,419 ​ ​ ​ ​ ​ ​ ​ Net income (loss) per common share: ​ ​ ​ ​ ​ ​ Basic ​ $ 4.13 ​ $ ( 1.39 ) Diluted ​ $ 4.10 ​ $ ( 1.39 ) ​ The denominator for diluted net income (loss) per common share for the 13 weeks ended May 1, 2021 and May 2, 2020 excludes 262 and 732 stock options and restricted stock units, respectively, due to their anti-dilutive effects. Outstanding performance-based restricted stock units are included in the computation of dilutive shares only to the extent that the underlying performance conditions are satisfied prior to the end of the reporting period or would be considered satisfied if the end of the reporting period were the end of the related contingency period and the results would be dilutive under the treasury stock method. 14. Share repurchase program On March 14, 2019, the Board of Directors authorized a share repurchase program (the 2019 Share Repurchase Program) pursuant to which the Company could repurchase up to $ 875,000 of the Company’s common stock. The 2019 Share Repurchase Program authorization revoked the previously authorized but unused amount of $ 25,435 from the earlier share repurchase program. The 2019 Share Repurchase Program did not have an expiration date but provided for suspension or discontinuation at any time. On March 12, 2020, the Board of Directors authorized a share repurchase program (the 2020 Share Repurchase Program) pursuant to which the Company may repurchase up to $ 1,600,000 of the Company’s common stock. The 2020 Share Repurchase Program authorization revoked the previously authorized but unused amount of $ 177,805 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. A summary of common stock repurchase activity is presented in the following table: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 13 Weeks Ended ​ ​ May 1, ​ May 2, (In thousands) ​ 2021 2020 Shares repurchased ​ ​ 1,243 ​ ​ 327 Total cost of shares repurchased ​ $ 392,309 ​ $ 72,981 ​ ​ ​ ​ ​ ​ 15 Table of Contents