What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-24 compared with 2023-05-25 · 55 added, 34 removed, 209 unchanged (30% of the section changed)

59 unchanged sentences

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

The overall beauty market expanded in 2022 and into the first quarter of fiscal 2023, supported by strong consumer engagement with the beauty category.

The overall beauty market expanded in 2022 and into the first half of fiscal 2023, supported by strong consumer engagement with the beauty category.

We remain confident that our differentiated and diverse business model, our commitment to strategic investments, and our highly engaged associates will continue to drive market share gains over the long term.

Impact of inflation and other macroeconomic trends

Although we do not believe inflation had a material impact on our sales during the first quarter of fiscal 2023, continued pressure from inflation or other evolving macroeconomic conditions could have an adverse impact on consumer spending and could lead to a recession.

Although we do not believe inflation had a material impact on our sales during the first half of fiscal 2023, continued pressure from inflation or other evolving macroeconomic conditions could have an adverse impact on consumer spending and could lead to a recession.

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

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

Interest income represents interest primarily from cash equivalents, which include highly liquid investments such as money market funds and certificates of deposit with an original maturity of three months or less from the date of purchase.

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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 2023 and 2022 ended on April 29, 2023 and April 30, 2022, respectively.

The Company’s second quarter in fiscal 2023 and 2022 ended on July 29, 2023 and July 30, 2022, respectively.

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

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13 Weeks Ended

26 Weeks Ended

(Dollars in thousands)

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13 Weeks Ended

26 Weeks Ended

(Percentage of net sales)

6 unchanged sentences

Income tax expense

Comparison of 13 weeks ended April 29, 2023 to 13 weeks ended April 30, 2022

Net sales increased $288.4 million or 12.3%, to $2.6 billion for the 13 weeks ended April 29, 2023, compared to $2.3 billion for the 13 weeks ended April 30, 2022.

The net sales increase was primarily due to increased comparable sales, strong new store performance, and an increase of $18.9 million in other revenue.

The total comparable sales increase of 9.3% was driven by an 11.0% increase in transactions and a 1.5% decrease in average ticket.

Gross profit increased $113.8 million or 12.1%, to $1.1 billion for the 13 weeks ended April 29, 2023, compared to $941.0 million for the 13 weeks ended April 30, 2022.

Gross profit as a percentage of net sales decreased to 40.0% for the 13 weeks ended April 29, 2023, compared to 40.1% for the 13 weeks ended April 30, 2022.

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

Comparison of 13 weeks ended July 29, 2023 to 13 weeks ended July 30, 2022

Net sales increased $232.7 million or 10.1%, to $2.5 billion for the 13 weeks ended July 29, 2023, compared to $2.3 billion for the 13 weeks ended July 30, 2022.

The net sales increase was primarily due to increased comparable sales, strong new store performance, and an increase in other revenue compared to the 13 weeks ended July 30, 2022.

The total comparable sales increase of 8.0% during the 13 weeks ended July 29, 2023 was driven by a 9.0% increase in transactions and a 1.0% decrease in average ticket.

Gross profit increased $65.4 million or 7.1%, to $993.6 million for the 13 weeks ended July 29, 2023, compared to $928.2 million for the 13 weeks ended July 30, 2022.

Gross profit as a percentage of net sales decreased to 39.3% for the 13 weeks ended July 29, 2023, compared to 40.4% for the 13 weeks ended July 30, 2022.

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

Selling, general and administrative expenses

Selling, general and administrative (SG&A) expenses increased $111.2 million or 22.2%, to $612.1 million for the 13 weeks ended April 29, 2023, compared to $501.0 million for the 13 weeks ended April 30, 2022.

SG&A expenses as a percentage of net sales increased to 23.2% for the 13 weeks ended April 29, 2023, compared to 21.4% for the 13 weeks ended April 30, 2022, primarily due to deleverage of store payroll and benefits, deleverage of corporate overhead due to strategic investments, and deleverage of marketing expenses, partially offset by leverage of incentive compensation and store expenses.

Selling, general and administrative (SG&A) expenses increased $66.2 million or 12.4%, to $600.7 million for the 13 weeks ended July 29, 2023, compared to $534.5 million for the 13 weeks ended July 30, 2022.

SG&A expenses as a percentage of net sales increased to 23.7% for the 13 weeks ended July 29, 2023, compared to 23.3% for the 13 weeks ended July 30, 2022, primarily due to higher corporate overhead due to strategic investments, higher store payroll and benefits, and higher store expenses, partially offset by leverage of incentive compensation.

Pre-opening expenses

Pre-opening expenses were $0.7 million for the 13 weeks ended April 29, 2023 compared to $2.3 million for the 13 weeks ended April 30, 2022.

Pre-opening expenses were $1.3 million for the 13 weeks ended July 29, 2023 compared to $2.3 million for the 13 weeks ended July 30, 2022.

Interest income, net

Net interest income was $4.4 million for the 13 weeks ended July 29, 2023 compared to $0.1 million for the 13 weeks ended July 30, 2022, due to higher average interest rates on cash balances.

We did not have any outstanding borrowings on the credit facility as of July 29, 2023, January 28, 2023, and July 30, 2022.

Income tax expense

Income tax expense of $96.0 million for the 13 weeks ended July 29, 2023 represents an effective tax rate of 24.2%, compared to $95.9 million of income tax expense representing an effective tax rate of 24.5% for the 13 weeks ended July 30, 2022.

Net income was $300.1 million for the 13 weeks ended July 29, 2023, compared to $295.7 million for the 13 weeks ended July 30, 2022.

The increase in net income is primarily related to the $65.4 million increase in gross profit and the $4.3 million increase in interest income, partially offset by the $66.2 million increase in SG&A expenses.

Comparison of 26 weeks ended July 29, 2023 to 26 weeks ended July 30, 2022

Net sales increased $521.1 million or 11.2%, to $5.2 billion for the 26 weeks ended July 29, 2023, compared to $4.6 billion for the 26 weeks ended July 30, 2022.

The net sales increase was primarily due to increased comparable sales, strong new store performance, and an increase in other revenue compared to the 26 weeks ended July 30, 2022.

comparable sales increase of 8.7% during the 26 weeks ended July 29, 2023 was driven by a 10.1% increase in transactions and a 1.4% decrease in average ticket.

Gross profit increased $179.3 million or 9.6%, to $2.0 billion for the 26 weeks ended July 29, 2023, compared to $1.9 billion for the 26 weeks ended July 30, 2022.

Gross profit as a percentage of net sales decreased to 39.7% for the 26 weeks ended July 29, 2023, compared to 40.3% for the 26 weeks ended July 30, 2022.

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

Selling, general and administrative expenses

SG&A expenses increased $177.4 million or 17.1%, to $1.2 billion for the 26 weeks ended July 29, 2023, compared to $1.0 billion for the 26 weeks ended July 30, 2022.

SG&A expenses as a percentage of net sales increased to 23.5% for the 26 weeks ended July 29, 2023, compared to 22.3% for the 26 weeks ended July 30, 2022, primarily due to higher corporate overhead due to strategic investments, higher store payroll and benefits, and higher marketing expenses, partially offset by leverage of incentive compensation.

Pre-opening expenses

Pre-opening expenses was $1.9 million for the 26 weeks ended July 29, 2023 compared to $4.6 million for the 26 weeks ended July 30, 2022.

Interest (income) expense, net

Interest income, net was $7.3 million for the 13 weeks ended April 29, 2023 compared to interest expense, net of $0.4 million for the 13 weeks ended April 30, 2022, due to higher average interest rates and higher average cash balances during the quarter.

We did not have any outstanding borrowings on the credit facility as of April 29, 2023 and April 30, 2022.

Net interest income was $11.8 million for the 26 weeks ended July 29, 2023 compared to net interest expense of $0.3 million for the 26 weeks ended July 30, 2022 due to higher average interest rates on cash balances.

We did not have any outstanding borrowings on the credit facility as of July 29, 2023, January 28, 2023, and July 30, 2022.

Income tax expense

Income tax expense of $102.4 million for the 13 weeks ended April 29, 2023 represents an effective tax rate of 22.8%, compared to $105.9 million of income tax expense representing an effective tax rate of 24.2% for the 13 weeks ended April 30, 2022.

Income tax expense of $198.4 million for the 26 weeks ended July 29, 2023 represents an effective tax rate of 23.5%, compared to $201.8 million of income tax expense representing an effective tax rate of 24.3% for the 26 weeks ended July 30, 2022.

The lower effective tax rate is primarily due to benefits from income tax accounting for stock-based compensation.

Net income was $347.1 million for the 13 weeks ended April 29, 2023, compared to $331.4 million for the 13 weeks ended April 30, 2022.

The increase in net income is primarily related to the $113.8 million increase in gross profit, the $7.7 million increase in interest income, net, and the $3.5 million decrease in income tax expense, partially offset by the $111.2 million increase in SG&A expenses.

Net income was $647.2 million for the 26 weeks ended July 29, 2023 compared to $627.1 million for the 26 weeks ended July 30, 2022.

The increase in net income is primarily related to the $179.3 million increase in gross profit, the $12.1 million increase in interest income, and the $3.4 million decrease in income taxes, partially offset by the $177.4 million increase in SG&A expenses.

Liquidity and capital resources

1 unchanged sentence

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

As of April 29, 2023, January 28, 2023, and April 30, 2022, we had cash and cash equivalents of $636.4 million, $737.9 million, and $654.5 million, respectively.

As of July 29, 2023, January 28, 2023, and July 30, 2022, we had cash and cash equivalents of $388.6 million, $737.9 million, and $434.2 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 investment in our information technology systems.

5 unchanged sentences

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 29, 2023 and July 30, 2022:

26 Weeks Ended

5 unchanged sentences

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 decrease in net cash provided by operating activities in the first quarter of fiscal 2023 compared to the first quarter of fiscal 2022 was mainly due to a larger increase in merchandise inventories in the first quarter of fiscal 2023 and the timing of accrued liabilities and receivable collections, partially offset by the increase in net income, a decrease in prepaid expenses, and the timing of accounts payable.

The decrease in net cash provided by operating activities in the first 26 weeks of fiscal 2023 compared to the first 26 weeks of fiscal 2022 was mainly due to the timing of accounts payable and accrued liabilities, a larger increase in merchandise inventories in the first 26 weeks of fiscal 2023, and the timing of receivable collections, partially offset by a decrease in prepaid expenses and increase in net income.

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

Merchandise inventories, net were $1.75 billion at April 29, 2023, compared to $1.57 billion at April 30, 2022, representing an increase of $180.7 million or 11.5%.

Merchandise inventories, net were $1.82 billion at July 29, 2023, compared to $1.67 billion at July 30, 2022, representing an increase of $149.4 million or 9.0%.

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

● $102 million increase to support increased demand, product cost increases, and brand expansions;

● $49 million increase due to the addition of 41 net new stores opened since April 30, 2022;

● $75 million increase to support increased demand and product cost increases;

● $47 million increase due to the addition of 37 net new stores opened since July 30, 2022;

● $28 million increase due to new brand launches.

1 unchanged sentence

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.

Investing activities for capital expenditures were $109.8 million during the 13 weeks ended April 29, 2023 compared to $71.1 million during the 13 weeks ended April 30, 2022.

During the 13 weeks ended April 29, 2023, we opened 5 new stores, closed one store, remodeled two stores, and relocated one store, compared to the 13 weeks ended April 30, 2022, when we opened 10 new stores and relocated six stores.

The increase in net cash used in investing activities in the first quarter of fiscal 2023 compared to the first quarter of fiscal 2022 was primarily due to more capital expenditures compared to the first quarter of fiscal 2022.

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.

Investing activities for capital expenditures were $204.7 million during the 26 weeks ended July 29, 2023, compared to $120.5 million during the 26 weeks ended July 30, 2022.

During the 26 weeks ended July 29, 2023, we opened eight new stores, relocated three stores, and remodeled five stores, compared to the 26 weeks ended July 30, 2022, when we opened 17 new stores and relocated 10 stores.

The increase in net cash used in investing activities in the first 26 weeks of fiscal 2023 compared to the first 26 weeks of fiscal 2022 was primarily due to higher 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.

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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 increase in net cash used in financing activities in the first quarter of fiscal 2023 compared to the first quarter of fiscal 2022 was primarily due to an increase in share repurchases.

We had no borrowings outstanding under the credit facility as of April 29, 2023, January 28, 2023, and April 30, 2022.

The increase in net cash used in financing activities in the first 26 weeks of fiscal 2023 compared to the first 26 weeks of fiscal 2022 was primarily due to an increase in share repurchases.

We had no borrowings outstanding under the credit facility as of July 29, 2023, January 28, 2023, and July 30, 2022.

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.

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and the other lenders party thereto.

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.

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.

1 unchanged sentence

Outstanding borrowings bear interest, at the Company’s election, at either a base rate plus a margin of 0% to 0.125% or the Term Secured Overnight Financing Rate plus a margin of 1.125% to 1.250%, and a credit spread adjustment of 0.10%, with such margins based on the Company’s borrowing availability, and the unused line fee is 0.20% per annum.

As of April 29, 2023, January 28, 2023, and April 30, 2022 we had no borrowings outstanding under the credit facility.

As of April 29, 2023, we were in compliance with all terms and covenants of the Loan Agreement.

As of July 29, 2023, January 28, 2023, and July 30, 2022, we had no borrowings outstanding under the credit facility.

As of July 29, 2023, we were in compliance with all terms and covenants of the Loan Agreement.

Our business is subject to seasonal fluctuation.

12 unchanged sentences

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