What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-03-25 compared with 2021-03-26 · 128 added, 157 removed, 228 unchanged (56% of the section changed)

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and salons and authorized retail outlets for professional hair care products.

We developed a unique specialty retail concept that offers a broad range of brands and price points, a compelling value proposition, and a convenient and welcoming shopping environment.

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

We developed a unique specialty retail concept that offers a broad range of brands and price points, select beauty services, and a convenient and welcoming shopping environment.

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

We estimate that female beauty enthusiasts represent approximately 60% of shoppers and 75% of spend in the U.S.

beauty category.

We believe our strategy provides us with the competitive advantages that have contributed to our financial performance.

We are the largest beauty retailer in the United States and the premier beauty destination for cosmetics, fragrance, skin care products, hair care products, and salon services.

We provide unmatched product breadth, value, and convenience in a distinctive specialty retail environment.

Today, we are the largest beauty retailer in the United States and the premier beauty destination for cosmetics, fragrance, skin care products, hair care products, and salon services.

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, 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.

a differentiated assortment of more than 25,000 beauty products across a variety of categories and price points as well as a variety of beauty services, including salon services, in more than 1,300 stores predominantly located in convenient, high-traffic locations;

engaging digital experiences delivered through our website, ulta.com, and our mobile applications;

our best-in-class loyalty program that enables members to earn points for every dollar spent on products and beauty services and provides us with deep, proprietary customer insights;

and our ability to cultivate human connection with warm and welcoming guest experiences across all of our channels.

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, position us to capture additional market share in the industry.

1) drive breakthrough and disruptive growth through an expanded definition of All Things Beauty, 2) evolve the omnichannel experience through connected physical and digital ecosystems, All In Your World, 3) expand and deepen our presence across the beauty journey, solidifying Ulta Beauty at the Heart of the Beauty Community, 4) drive operational excellence and optimization, 5) protect and cultivate our world-class culture and talent, and 6) expand our environmental and social impact.

We believe that the attractive and growing U.S.

beauty products and salon services industry, the expanding definition of beauty and role that omnichannel capabilities play in consumers’ lives, 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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economic conditions, changes in merchandise strategy or mix, and timing and effectiveness of our marketing activities, among others.

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.

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.

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

Long-term operating profit is expected to increase as a result of our efforts to optimize our real estate portfolio, expand merchandise margin and leverage our fixed store costs with comparable sales increases and operating efficiencies, partially 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.

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

Current Trends

Impact of COVID-19

As previously discussed, our results of operations for fiscal 2020 were significantly impacted by the effects of the COVID-19 pandemic.

During fiscal 2021, we continued to closely monitor the impact of COVID-19 on all facets of our

As we navigated the impact of the pandemic, we proactively took steps to optimize our cost structure, while also investing in new capabilities to support future growth .

During fiscal 2021, we experienced an increase in sales driven primarily by the favorable impact from stronger consumer confidence, government stimulus payments, and the easing of COVID-19 restrictions.

While operations during fiscal 2021 did not appear to be as negatively impacted, the continuing COVID-19 pandemic could have additional negative impacts in the future.

The extent of the impact of the pandemic on our business and financial results will depend on future developments, including, but not limited to, the potential temporary reclosing of certain 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, supply chain disruptions, increased freight costs and higher wholesale costs, the continued duration of the pandemic and any variants of the virus, the duration, timing and severity of the impact on consumer spending, the timing and effectiveness of vaccine distribution, vaccination rates, and how quickly and to what extent normal economic and operating conditions can resume.

Industry trend s

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 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.

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.

However, 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 travel, entertainment and social gatherings.

The overall beauty market declined in 2020 but stabilized in 2021, as consumers began to recover from the impacts of COVID-19.

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.

Impact of inflation and changing prices

Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and selling, general and administrative expenses as a percentage of net sales if the selling prices of our products do not increase with these increased costs.

In addition, inflation could materially increase the interest rates on any future debt.

Basis of presentation

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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.

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.

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 and royalties derived from the partnership with Target, as well as deferred revenue related to the loyalty program and gift card breakage.

Comparable sales reflect sales for stores beginning on the first day of the 14 th month of operation.

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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 and salon services (including stores temporarily closed due to COVID-19), 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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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.

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

This presentation of items included in cost of sales may not be comparable to the way in which our competitors or other retailers compute their cost of sales.

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

Interest expense, net includes both interest expense and income.

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

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

The Company’s fiscal years ended January 29, 2022 (fiscal 2021), January 30, 2021 (fiscal 2020), and February 1, 2020 (fiscal 2019) were all 52-week years.

As of January 29, 2022, we operated 1,308 stores across 50 states.

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Fiscal year 2021 versus fiscal year 2020

Net sales increased $2.5 billion, or 40.3%, to $8.6 billion in fiscal 2021 compared to $6.2 billion in fiscal 2020.

The net sales increase was primarily due to the favorable impact from stronger consumer confidence, government stimulus payments, and the easing of COVID-19 restrictions, and an increase of $15.1 million in other revenue.

The total comparable sales increase of 37.9% in fiscal 2021, compared to a decrease of 17.9% in fiscal 2020, was driven by a 30.0% increase in transactions and a 6.0% increase in average ticket.

Gross profit increased $1.4 billion, or 72.8%, to $3.4 billion in fiscal 2021, compared to $1.9 billion in fiscal 2020.

Gross profit as a percentage of net sales increased 730 basis points to 39.0% in fiscal 2021 compared to 31.7% in fiscal 2020.

The increase in gross profit margin was primarily due to:

● 300 basis points leverage of fixed costs attributed to the impact of higher sales;

● 190 basis points of improvements in merchandise margins driven by lower promotional activity and cost optimization efforts;

● 140 basis points of leverage due to favorable channel mix shifts;

● 100 basis points of leverage in salon expenses attributed to the impact of higher sales.

Selling, general and administrative expenses

Selling, general and administrative (SG&A) expenses increased $0.5 billion, or 30.2%, to $2.1 billion in fiscal 2021 compared to $1.6 billion in fiscal 2020.

As a percentage of net sales, SG&A expenses decreased 180 basis points to 23.9% in fiscal 2021 compared to 25.7% in fiscal 2020.

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

● 180 basis points of leverage of corporate overhead due to higher sales;

● 90 basis points of leverage of store payroll and benefits due to higher sales;

● 50 basis points of leverage of store expenses due to higher sales;

partially offset by

● 80 basis points of deleverage due to less employee retention credits received under the Coronavirus Aid, Relief and Economic Security Act (CARES Act);

● 60 basis points of deleverage due to higher incentive compensation.

Impairment, restructuring and other costs

There were no impairment, restructuring and other costs recognized in fiscal 2021 compared to $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.

Pre-opening expenses

Pre-opening expenses decreased $5.5 million, or 36.6%, to $9.5 million in fiscal 2021 compared to $15.0 million in fiscal 2020 due to current year real estate activity and stores expected to open in the first quarter of fiscal 2022 compared to the first quarter of fiscal 2021.

Interest expense, net

Interest expense, net was $1.7 million in fiscal 2021 compared to $5.7 million of interest expense, net in fiscal 2020.

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

Interest income results from short-term investments.

We did not have any outstanding borrowings on our credit facility as of January 29, 2022 and January 30, 2021.

Income tax expense

Income tax expense of $310.0 million in fiscal 2021 represents an effective tax rate of 23.9%, compared to fiscal 2020 income tax expense of $55.3 million and an effective tax rate of 23.9%.

The higher income tax expense is primarily due to higher operating income compared to fiscal 2020.

Net income increased $810.0 million to $985.8 million in fiscal 2021 compared to $175.8 million in fiscal 2020.

The increase in net income was primarily due to a $1.4 billion increase in gross profit and a $114.3 million decrease in impairment, restructuring and other costs, partially offset by a $0.5 billion increase in SG&A expenses and $254.7 million increase in income taxes.

Fiscal year 2020 versus fiscal year 2019

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

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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.

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.

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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.

and $15.8 million of severance charges.

All restructuring expenses were recognized in fiscal 2020.

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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.

Interest income results from short-term investments.

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

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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.

The 5.0% comparable sales increase included a 3.3% increase in transactions and a 1.7% increase in average ticket.

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

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.

The increase in gross profit margin was primarily due to:

● 50 basis points improvement in merchandise margins driven by our marketing and merchandising strategies and benefits from our Efficiencies for Growth (EFG) initiatives;

● 20 basis points of leverage in fixed store costs attributed to the impact of higher sales volume, partially offset by;

● 40 basis points of deleverage due to investments in our salon services and supply chain operation.

Selling, general and administrative expenses

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.

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

● 80 basis points of deleverage primarily due to strategic investments in future growth opportunities and infrastructure to support our EFG initiatives;

● 50 basis points of deleverage related to higher payroll and benefit-related expenses, partially offset by;

● 30 basis points of leverage in lower variable compensation expense;

● 10 basis points of leverage in marketing expense attributed to strong sales growth.

Pre-opening expenses

Pre-opening expenses decreased $0.5 million, or 2.6%, to $19.3 million in fiscal 2019 compared to $19.8 million in fiscal 2018.

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

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

Interest income, net

Interest income, net was $5.1 million in fiscal 2019 and fiscal 2018.

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 1, 2020 and February 2, 2019.

Income tax expense

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 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.

Liquidity and capital resources

Our primary sources of liquidity are cash and cash equivalents, cash flows from operations, and borrowings under our credit facility.

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

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 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.

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.

The following table presents a summary of our cash flows for fiscal years 2020, 2019 and 2018:

Our most significant ongoing short-term cash requirements relate primarily to funding operations (including expenditures for lease expenses, inventory, labor, distribution, advertising and marketing, and tax liabilities) as well as periodic spend for capital expenditures, investments, and share repurchases.

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

Long-term cash requirements primarily relate to funding lease expenses and other purchase commitments.

We generally fund short-term and long-term cash requirements with cash from operating activities.

We believe our primary sources of liquidity will satisfy our cash requirements over both the short-term (the next twelve months) and long-term.

The following table summarizes contractual cash requirements as of January 29, 2022:

(In thousands)

Operating lease obligations (1)

Purchase obligations

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

Also included are legally binding minimum lease payments for leases signed but not yet commenced of $73.6 million, which are excluded from operating lease liabilities shown on our consolidated balance sheets.

(2) The unrecognized tax benefit of $3.4 million as of January 29, 2022 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.

The amount of purchase obligations relates to commitments for products and services and other goods and service contracts entered into as of January 29, 2022.

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

We believe our ability to generate substantial cash from operating activities and readily secure financing at competitive rates are key strengths that give us significant flexibility to meet our short and long-term financial commitments.

The following table presents a summary of our cash flows during the last three years:

Fiscal year ended

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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, 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.

Operating activities consist of net income adjusted for certain non-cash items, including depreciation and amortization, non-cash lease expense, long-lived asset impairment charges, 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 increase in net cash provided by operating activities in fiscal 2021 is mainly due to the increase in net income and deferred revenue, partially offset by higher merchandise inventories, higher cash outflow from higher income taxes, and lower long-lived asset impairment charges compared to fiscal 2020.

The increase in net income was primarily due to an increase in gross profit resulting from higher sales and a decrease in impairment, restructuring and other costs, partially offset by an increase in SG&A expenses and income taxes.

Merchandise inventories, net were $1.5 billion at January 29, 2022, compared to $1.2 billion at January 30, 2021, representing an increase of $331.0 million or 28.3%.

The increase in total inventory was primarily driven by the addition of 44 net new stores opened since January 30, 2021, inventory to support new brand launches, and the acceleration of inventory receipts to support expected demand and mitigate anticipated global supply chain disruptions.

The decrease in net cash provided by operating activities in fiscal 2020 relative to fiscal 2019 was primarily due to the decrease in net income, merchandise inventories, and the timing of accounts payable due to the COVID-19 pandemic.

Investing activities

We have historically used cash primarily for new, remodeled, relocated, and refreshed stores, supply chain investments, short-term investments, and investments in information technology systems.

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 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:

The increase in net cash used in investing activities in fiscal 2021 relative to fiscal 2020 was primarily due to less proceeds of short-term investments and more capital expenditures compared to fiscal 2020.

The decrease in net cash used in investing activities in fiscal 2020 relative to fiscal 2019 was primarily due to less capital expenditures due to actions we took to preserve liquidity as we navigated through the COVID-19 pandemic and an increase in proceeds of short-term investments offset by less purchases of short-term investments.

Capital expenditures

The following table presents a summary of our store activities during the last three years:

Fiscal year ended

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During fiscal 2021, 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.

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

Capital expenditures during the last three years by major category are as follows:

(In millions)

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Store Maintenance and Other

Our future investments will depend primarily on the number of new, remodeled, and relocated stores, information technology systems, and supply chain investments that we undertake and the timing of these expenditures.

Our future investments will depend primarily on the number of new, remodeled, and relocated stores, information technology systems investments, and supply chain investments that we undertake and the timing of these expenditures.

Based on past performance and current expectations, we believe our sources of liquidity will be sufficient to fund future capital expenditures.

We expect fiscal 2022 capital expenditures will be $425 million, and will be used to fund our new, remodeled, and relocated stores and strategic priorities, including investments in information technology systems and supply chain optimization.

Financing activities

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.

Financing activities primarily include share repurchases, borrowing and repayment of our revolving credit facility, 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.

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

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 increase in net cash used in financing activities in fiscal 2021 relative to fiscal 2020 was primarily due to an increase in share repurchases offset by an increase in stock option exercises, and no activity under our revolving credit facility during fiscal 2021.

The decrease in net cash used in financing activities in fiscal 2020 relative to fiscal 2019 was primarily due to borrowing and repayment under our revolving credit facility and the suspension of the share repurchase program in order to strengthen our liquidity and preserve cash while navigating the COVID-19 pandemic.

We had no borrowings outstanding under the credit facility at the end of fiscal 2021, 2020, and 2019.

The zero outstanding borrowings position is due to a combination of factors including sales demand, overall performance of management initiatives including expense control, and 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, seasonal inventory needs, or share repurchases.

Share repurchase program

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

The 2019 Share Repurchase Program authorization revoked the previously authorized but unused amount of $25.4 million 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 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.

In March 2020, the Board of Directors authorized a share repurchase program (the 2020 Share Repurchase Program) pursuant to which the Company could repurchase up to $1.6 billion of the Company’s common stock.

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

The 2020 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:

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

Fiscal year ended

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Total cost of shares repurchased

On March 7, 2022, the Board of Directors authorized a new share repurchase program (the 2022 Share Repurchase Program) pursuant to which the Company may repurchase up to $2.0 billion of the Company’s common stock.

The 2022 Share Repurchase Program authorization revokes the previously authorized but unused amounts from the 2020 Share Repurchase Program.

The 2022 Share Repurchase Program does not have an expiration date and may be suspended or discontinued at any time.

Credit facility

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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.

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 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.

As of January 29, 2022 and January 30, 2021, 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.

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As such, we believe that period-to-period comparisons of our results of operations should not be relied upon as an indication of our future performance.

Impact of inflation and changing prices

Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and SG&A expenses as a percentage of net sales if the selling prices of our products do not increase with these increased costs.

In addition, inflation could materially increase the interest rates on any future debt.

Off-balance sheet arrangements

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.

Contractual obligations

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 January 30, 2021:

(In thousands)

Operating lease obligations (1)

Purchase obligations

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

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 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

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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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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 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.

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.

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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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 operations in the period of enactment.

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.

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.

The estimated tax benefit of an uncertain tax position is recorded in our consolidated financial statements only after determining a more-likely-than-not probability that the uncertain tax position will withstand challenge, if any, from applicable taxing authorities.

The estimated tax benefit of an uncertain tax position is

recorded in our consolidated financial statements only after determining a more-likely-than-not probability that the uncertain tax position will withstand challenge, if any, from applicable taxing authorities.

Judgment is required in assessing the future tax consequences of events that have been recognized on our consolidated financial statements or tax returns.

Variations in the actual outcome of these future tax consequences could materially impact our consolidated financial statements.

Recent accounting pronouncements not yet adopted

See Note 2 to our consolidated financial statements, “Summary of significant accounting policies – Recent accounting pronouncements not yet adopted.”

Recently adopted accounting pronouncements

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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