What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-08-25 compared with 2022-05-26 · 68 added, 48 removed, 200 unchanged (37% 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, select beauty services, and a convenient and welcoming shopping environment.

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

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.

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We closely monitor the continuing impact of COVID-19 on all facets of our business.

During the first quarter of fiscal 2022, we experienced an increase in sales driven primarily by the favorable impact from the easing of COVID-19 restrictions.

While operations during the first quarter of fiscal 2022 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 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.

During the first half of fiscal 2022, we experienced an increase in sales driven primarily by the favorable impact from the easing of COVID-19 restrictions.

While operations during the first half of fiscal 2022 did not appear to be negatively impacted, the continuing COVID-19 pandemic could have negative impacts in the future.

The extent of the impact of the pandemic on our future business and financial results will depend on, among other things, the potential temporary reclosing of certain stores, the potential temporary restrictions on certain store operating hours and/or in-store capacity, 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 trends

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

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.

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.

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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, continued pressure from inflation could have an adverse impact on consumer spending and sales.

Furthermore, inflation pressure could negatively impact 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 higher costs.

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Our quarterly periods are the 13 weeks ending on the Saturday closest to April 30, July 31, October 31, and January 31.

The Company’s first quarter in fiscal 2022 and 2021 ended on April 30, 2022 and May 1, 2021, respectively.

The Company’s second quarter in fiscal 2022 and 2021 ended on July 30, 2022 and July 31, 2021, respectively.

Our quarterly results of operations have varied in the past and are likely to do so again in the future.

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.

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.

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

13 Weeks Ended

26 Weeks Ended

(Dollars in thousands)

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Operating income

Interest expense, net

Interest expense (income), net

Income before income taxes

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13 Weeks Ended

26 Weeks Ended

(Percentage of net sales)

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Operating income

Interest expense, net

Interest expense (income), net

Income before income taxes

Income tax expense

Comparison of 13 weeks ended April 30, 2022 to 13 weeks ended May 1, 2021

Net sales increased $407.4 million or 21.0%, to $2.3 billion for the 13 weeks ended April 30, 2022, compared to $1.9 billion for the 13 weeks ended May 1, 2021.

The net sales increase was primarily due to the favorable impact in the U.S.

from fewer COVID-19 restrictions and an increase of $20.4 million in other revenue.

The total comparable sales increase of 18.0% was driven by a 10.0% increase in transactions and an 7.3% increase in average ticket.

Gross profit increased $187.2 million or 24.8%, to $941.0 million for the 13 weeks ended April 30, 2022, compared to $753.8 million for the 13 weeks ended May 1, 2021.

Gross profit as a percentage of net sales increased to 40.1% for the

13 weeks ended April 30, 2022, compared to 38.9% for the 13 weeks ended May 1, 2021.

The increase in gross profit margin was primarily due to leverage in fixed costs, strong growth in other revenue, and favorable channel mix shifts, partially offset by deleverage in merchandise margins.

Comparison of 13 weeks ended July 30, 2022 to 13 weeks ended July 31, 2021

Net sales increased $329.9 million or 16.8%, to $2.3 billion for the 13 weeks ended July 30, 2022, compared to $2.0 billion for the 13 weeks ended July 31, 2021.

The net sales increase was primarily due to the favorable impact from the continued resilience of the beauty category, the impact of new brands and product innovation, the easing of COVID-19 restrictions and an increase of $19.0 million in other revenue compared to the 13 weeks ended July 31, 2021.

The total comparable sales increase of 14.4% during the 13 weeks ended July 30, 2022 was driven by an 8.3% increase in transactions and a 5.6% increase in average ticket.

Gross profit increased $130.2 million or 16.3%, to $928.2 million for the 13 weeks ended July 30, 2022, compared to $798.0 million for the 13 weeks ended July 31, 2021.

Gross profit as a percentage of net sales decreased to 40.4% for the 13 weeks ended July 30, 2022, compared to 40.6% for the 13 weeks ended July 31, 2021.

The decrease in gross profit margin was primarily due to lower merchandise margin and higher inventory shrink, partially offset by leverage of fixed costs and strong growth in other revenue.

Selling, general and administrative expenses

Selling, general and administrative (SG&A) expenses increased $57.1 million or 12.9%, to $501.0 million for the 13 weeks ended April 30, 2022, compared to $443.9 million for the 13 weeks ended May 1, 2021.

SG&A expenses as a percentage of net sales decreased to 21.4% for the 13 weeks ended April 30, 2022, compared to 22.9% for the 13 weeks ended May 1, 2021, primarily due to lower marketing expenses and leverage in store payroll and benefits due to higher sales, partially offset by deleverage in corporate overhead due to strategic investments.

Selling, general and administrative (SG&A) expenses increased $70.2 million or 15.1%, to $534.5 million for the 13 weeks ended July 30, 2022, compared to $464.3 million for the 13 weeks ended July 31, 2021.

SG&A expenses as a percentage of net sales decreased to 23.3% for the 13 weeks ended July 30, 2022, compared to 23.6% for the 13 weeks ended July 31, 2021, primarily due to lower marketing expenses and leverage of store payroll and benefits and store expenses due to higher sales, partially offset by deleverage in corporate overhead primarily due to strategic investments and higher incentive compensation.

Pre-opening expenses

Pre-opening expenses were $2.3 million for the 13 weeks ended April 30, 2022 compared to $4.6 million for the 13 weeks ended May 1, 2021.

Pre-opening expenses increased $0.9 million to $2.3 million for the 13 weeks ended July 30, 2022 compared to $1.4 million for the 13 weeks ended July 31, 2021.

Interest expense (income), net

Interest income, net was $0.1 million for the 13 weeks ended July 30, 2022 compared to interest expense, net of $0.4 million for the 13 weeks ended July 31, 2021.

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

We did not have any outstanding borrowings on our credit facility as of July 30, 2022, January 29, 2022, and July 31, 2021.

Income tax expense

Income tax expense of $95.9 million for the 13 weeks ended July 30, 2022 represents an effective tax rate of 24.5%, compared to $81.0 million of tax expense representing an effective tax rate of 24.4% for the 13 weeks ended July 31, 2021.

Net income was $295.7 million for the 13 weeks ended July 30, 2022, compared to $250.9 million for the 13 weeks ended July 31, 2021.

The increase in net income is primarily due to the $130.2 million increase in gross profit, partially offset by the $70.2 million increase in SG&A expenses and the $14.9 million increase in income taxes.

Comparison of 26 weeks ended July 30, 2022 to 26 weeks ended July 31, 2021

Net sales increased $737.3 million or 18.9%, to $4.6 billion for the 26 weeks ended July 30, 2022, compared to $3.9 billion for the 26 weeks ended July 31, 2021.

The net sales increase was primarily due to the favorable impact from the continued resilience of the beauty category, the impact of new brands and product innovation, the easing of COVID-19 restrictions and an increase of $39.4 million in other revenue compared to the 26 weeks ended July 31, 2021.

The total comparable sales increase of 16.2% during the 26 weeks ended July 30, 2022 was driven by a 9.2% increase in transactions and a 6.4% increase in average ticket.

Gross profit increased $317.4 million or 20.5%, to $1.9 billion for the 26 weeks ended July 30, 2022, compared to $1.6 billion for the 26 weeks ended July 31, 2021.

Gross profit as a percentage of net sales increased to 40.3% for the 26 weeks ended July 30, 2022, compared to 39.7% for the 26 weeks ended July 31, 2021.

The increase in gross profit margin was primarily due to leverage of fixed costs, strong growth in other revenue, and favorable channel mix shifts, partially offset by lower merchandise margin and higher inventory shrink.

Selling, general and administrative expenses

SG&A expenses increased $127.3 million or 14.0%, to $1.0 billion for the 26 weeks ended July 30, 2022, compared to $908.2 million for the 26 weeks ended July 31, 2021.

SG&A expenses as a percentage of net sales decreased to 22.3% for the 26 weeks ended July 30, 2022, compared to 23.3% for the 26 weeks ended July 31, 2021, due to lower marketing expenses and leverage of store payroll and benefits due to higher sales, partially offset by deleverage in corporate overhead primarily due to strategic investments.

Pre-opening expenses

Pre-opening expenses decreased $1.3 million to $4.6 million for the 26 weeks ended July 30, 2022, compared to $5.9 million for the 26 weeks ended July 31, 2021.

Interest expense, net

Interest expense, net of $0.4 million for the 13 weeks ended April 30, 2022 was consistent with the 13 weeks ended May 1, 2021.

Interest expense, net was $0.3 million for the 26 weeks ended July 30, 2022 compared to $0.8 million for the 26 weeks ended July 31, 2021.

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

We did not have any outstanding borrowings on the credit facility as of April 30, 2022 and May 1, 2021.

We did not have any outstanding borrowings on our credit facility as of July 30, 2022, January 29, 2022, and July 31, 2021.

Income tax expense

Income tax expense of $105.9 million for the 13 weeks ended April 30, 2022 represents an effective tax rate of 24.2%, compared to $74.7 million of income tax expense representing an effective tax rate of 24.5% for the 13 weeks ended May 1, 2021.

Net income was $331.4 million for the 13 weeks ended April 30, 2022, compared to $230.3 million for the 13 weeks ended May 1, 2021.

The increase in net income is primarily related to the $187.2 million increase in gross profit, partially offset by the $57.1 million increase in SG&A expenses and the $31.2 million increase in income tax expense.

Income tax expense of $201.8 million for the 26 weeks ended July 30, 2022 represents an effective tax rate of 24.3%, compared to $155.7 million of tax expense representing an effective tax rate of 24.4% for the 26 weeks ended July 31, 2021.

Net income was $627.1 million for the 26 weeks ended July 30, 2022 compared to $481.2 million for the 26 weeks ended July 31, 2021.

The increase in net income is primarily due to the $317.4 million increase in gross profit, partially offset by the $127.3 million increase in SG&A expenses and the $46.1 million increase in income taxes.

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.

As of April 30, 2022, January 29, 2022, and May 1, 2021, we had cash and cash equivalents of $654.5 million, $431.6 million, and $947.5 million, respectively.

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

As of July 30, 2022, January

29, 2022, and July 31, 2021, we had cash and cash equivalents of $434.2 million, $431.6 million, and $770.1 million, respectively.

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 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.

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.

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

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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:

The following table presents a summary of our cash flows for the 26 weeks ended July 30, 2022 and July 31, 2021:

26 Weeks Ended

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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 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 the first quarter of fiscal 2022 compared to the first quarter of fiscal 2021 was mainly due to the increase in net income and an increase in inventory , partially offset by the timing of accounts payable and accrued liabilities.

The increase in net cash provided by operating activities in the first 26 weeks of fiscal 2022 is mainly due to the increase in net income and merchandise inventories, partially offset by timing of accounts payable and accrued liabilities and increase in deferred revenue compared to the first 26 weeks of fiscal 2021.

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

Merchandise inventories, net were $1.57 billion at April 30, 2022, compared to $1.35 billion at May 1, 2021, representing an increase of $217.0 million or 16.0%.

The change in inventory is primarily due to the following:

● $29 million increase due to the addition of 28 net new stores opened since May 1, 2021;

Merchandise inventories, net were $1.67 billion at July 30, 2022, compared to $1.44 billion at July 31, 2021, representing an increase of $222.4 million or 15.4%.

The change in total inventory is primarily due to the following:

● $32 million increase due to the addition of 29 net new stores opened since July 31, 2021;

● $81 million increase due to new key brand launches;

● $110 million increase due to increased inventory costs and the acceleration of inventory receipts to support expected demand and mitigate global supply chain disruptions.

● $109 million increase due to inventory cost increases and inventory receipts to maintain strong in-stocks of key items to support expected demand.

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 $71.1 million during the 13 weeks ended April 30, 2022 compared to $34.6 million during the 13 weeks ended May 1, 2021.

During the 13 weeks ended April 30, 2022, we opened 10 new stores and relocated six stores, compared to the 13 weeks ended May 1, 2021, when we opened 28 new stores and relocated one store.

The increase in net cash used in investing activities in the first quarter of fiscal 2022 compared to the first quarter of fiscal 2021 was primarily due to more capital expenditures compared to the first quarter of fiscal 2021.

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.

Investment activities for capital expenditures were $120.5 million during the 26 weeks ended July 30, 2022, compared to $57.3 million during the 26 weeks ended July 31, 2021.

During the 26 weeks ended July 30, 2022, we opened 17 new stores and relocated 10 stores, compared to the 26 weeks ended July 31, 2021, when we opened 35 new stores, relocated two stores and remodeled five stores.

The increase in net cash used in investing activities in the first 26 weeks of fiscal 2022 compared to the first 26 weeks of fiscal 2021 was primarily due to more capital expenditures.

Our future investments will depend primarily on the number of new, remodeled, and relocated stores, information technology systems, and supply chain investments 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.

Financing activities

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

Financing activities 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.

The decrease in net cash used in financing activities in the first quarter of fiscal 2022 compared to the first quarter of fiscal 2021 was primarily due to a decrease in share repurchases.

We had no borrowings outstanding under the credit facility as of April 30, 2022, January 29, 2022, and May 1, 2021.

The decrease in net cash used in financing activities in the first 26 weeks of fiscal 2022 compared to the first 26 weeks of fiscal 2021 was primarily due to a decrease in share repurchases.

We had no borrowings outstanding under the credit facility as of July 30, 2022, January 29, 2022, and July 31, 2021.

The zero outstanding borrowings position continues to be due to a combination of factors including sales demand, overall performance of management initiatives including expense control, and inventory and other working capital reductions.

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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 April 30, 2022, January 29, 2022, and May 1, 2021 we had no borrowings outstanding under the credit facility.

As of April 30, 2022, we were in compliance with all terms and covenants of the Loan Agreement.

As of July 30, 2022, January 29, 2022, and July 31, 2021, we had no borrowings outstanding under the credit facility.

As of July 30, 2022, we were in compliance with all terms and covenants of the Loan Agreement.

Our business is subject to seasonal fluctuation.

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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-Q

Item 2. Management’s Discussion and Analysis