What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-30 compared with 2023-08-24 · 60 added, 57 removed, 207 unchanged (36% of the section changed)

54 unchanged sentences

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, guest experiences, systems, and supply chain required to support a 1,500 to 1,700 store chain in the U.S.

Long-term operating profit is expected to increase as a result of our

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, guest experiences, 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.

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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 half of fiscal 2023, supported by strong consumer engagement with the beauty category.

The overall beauty market expanded in 2022 and into the first 39 weeks of fiscal 2023, supported by healthy 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 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.

Although we do not believe inflation had a material impact on our sales during the first 39 weeks 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.

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

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

Basis of presentation

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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 second quarter in fiscal 2023 and 2022 ended on July 29, 2023 and July 30, 2022, respectively.

The Company’s third quarter in fiscal 2023 and 2022 ended on October 28, 2023 and October 29, 2022, respectively.

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

8 unchanged sentences

Operating income

Interest (income) expense, net

Interest income, net

Income before income taxes

10 unchanged sentences

Operating income

Interest (income) expense, net

Interest income, net

Income before income taxes

Income tax expense

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.

Comparison of 13 weeks ended October 28, 2023 to 13 weeks ended October 29, 2022

Net sales increased $150.1 million or 6.4%, to $2.5 billion for the 13 weeks ended October 28, 2023, compared to $2.3 billion for the 13 weeks ended October 29, 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 October 29, 2022.

The total comparable sales increase of 4.5% during the 13 weeks ended October 28, 2023 was driven by a 5.9% increase in transactions and a 1.4% decrease in average ticket.

Gross profit increased $29.3 million or 3.0%, to $992.1 million for the 13 weeks ended October 28, 2023, compared to $962.8 million for the 13 weeks ended October 29, 2022.

Gross profit as a percentage of net sales decreased to 39.9% for the 13 weeks ended October 28, 2023, compared to 41.2% for the 13 weeks ended October 29, 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.

Selling, general and administrative 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.

Selling, general and administrative (SG&A) expenses increased $64.2 million or 10.8%, to $661.4 million for the 13 weeks ended October 28, 2023, compared to $597.2 million for the 13 weeks ended October 29, 2022.

SG&A expenses as a percentage of net sales increased to 26.6% for the 13 weeks ended October 28, 2023, compared to 25.5% for the 13 weeks ended October 29, 2022, primarily due to higher corporate overhead due to strategic investments, higher store expenses, higher store payroll and benefits, and higher marketing expenses, partially offset by lower incentive compensation.

Pre-opening expenses

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.

Pre-opening expenses were $3.5 million for the 13 weeks ended October 28, 2023 compared to $3.8 million for the 13 weeks ended October 29, 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.

Net interest income was $2.5 million for the 13 weeks ended October 28, 2023 compared to $0.8 million for the 13 weeks ended October 29, 2022, due to higher average interest rates on cash balances.

As of October 28, 2023, we had $195.4 million outstanding under the credit facility.

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

Income tax expense of $80.2 million for the 13 weeks ended October 28, 2023 represents an effective tax rate of 24.3%, compared to $88.1 million of income tax expense representing an effective tax rate of 24.3% for the 13 weeks ended October 29, 2022.

Net income was $249.5 million for the 13 weeks ended October 28, 2023, compared to $274.6 million for the 13 weeks ended October 29, 2022.

The decrease in net income is primarily related to the $64.2 million increase in SG&A expenses, partially offset by the $29.3 million increase in gross profit, the $7.9 million decrease in income taxes, and the $1.6 million increase in interest income.

Comparison of 39 weeks ended October 28, 2023 to 39 weeks ended October 29, 2022

Net sales increased $671.2 million or 9.6%, to $7.7 billion for the 39 weeks ended October 28, 2023, compared to $7.0 billion for the 39 weeks ended October 29, 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 39 weeks ended October 29, 2022.

The total comparable sales increase of 7.3% during the 39 weeks ended October 28, 2023 was driven by an 8.7% increase in transactions and a 1.4% decrease in average ticket.

Gross profit increased $208.5 million or 7.4%, to $3.0 billion for the 39 weeks ended October 28, 2023, compared to $2.8 billion for the 39 weeks ended October 29, 2022.

Gross profit as a percentage of net sales decreased to 39.7% for the 39 weeks ended October 28, 2023, compared to 40.6% for the 39 weeks ended October 29, 2022.

The decrease in gross profit margin was primarily due to lower merchandise margin, higher inventory shrink, higher supply chain costs, and deleverage of salon expenses, 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.

SG&A expenses increased $241.6 million or 14.8%, to $1.9 billion for the 39 weeks ended October 28, 2023, compared to $1.6 billion for the 39 weeks ended October 29, 2022.

SG&A expenses as a percentage of net sales increased to 24.5% for the 39 weeks ended October 28, 2023, compared to 23.4% for the 39 weeks ended October 29, 2022, primarily due to higher corporate overhead due to strategic investments, higher store payroll and benefits, higher marketing expenses, and higher store expenses, partially offset by lower 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

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.

Pre-opening expenses were $5.4 million for the 39 weeks ended October 28, 2023 compared to $8.4 million for the 39 weeks ended October 29, 2022.

Interest income, net

Net interest income was $14.3 million for the 39 weeks ended October 28, 2023 compared to $0.6 million for the 39 weeks ended October 29, 2022 due to higher average interest rates on cash balances.

As of October 28, 2023, we had $195.4 million outstanding under the credit facility.

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

Income tax expense

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.

Income tax expense of $278.6 million for the 39 weeks ended October 28, 2023 represents an effective tax rate of 23.7%, compared to $289.9 million of income tax expense representing an effective tax rate of 24.3% for the 39 weeks ended October 29, 2022.

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

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.

Net income was $896.6 million for the 39 weeks ended October 28, 2023 compared to $901.7 million for the 39 weeks ended October 29, 2022.

The decrease in net income is primarily related to the $241.6 million increase in SG&A expenses, partially offset by the $208.5 million increase in gross profit, the $13.7 million increase in interest income, and the $11.3 million decrease 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 liabilities and deferred revenue.

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.

The most significant components of our working capital are merchandise inventories, receivables, and

cash and cash equivalents reduced by accounts payable, accrued liabilities, and deferred revenue.

As of October 28, 2023, January 28, 2023, and October 29, 2022, we had cash and cash equivalents of $121.8 million, $737.9 million, and $250.6 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.

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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 generally fund short-term and long-term cash requirements with cash from operating activities and supplement with borrowings under our credit facility, as necessary.

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

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 for the 26 weeks ended July 29, 2023 and July 30, 2022:

The following table presents a summary of our cash flows for the 39 weeks ended October 28, 2023 and October 29, 2022:

39 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 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 $1.82 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 decrease in net cash provided by operating activities in the first 39 weeks of fiscal 2023 compared to the first 39 weeks of fiscal 2022 was mainly due to a larger increase in merchandise inventories in the first 39 weeks of fiscal 2023, the timing of accrued liabilities and accounts payable, and the timing of receivable collections, partially offset by a decrease in prepaid income taxes and prepaid expenses.

Merchandise inventories, net were $2.3 billion at October 28, 2023, compared to $2.1 billion at October 29, 2022, representing an increase of $206.6 million or 9.8%.

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

● $76 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;

● $49 million increase due to the addition of 31 net new stores opened since October 28, 2022;

● $43 million increase due to our new market fulfillment center in Greer, South Carolina;

● $40 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 $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.

Investing activities for capital expenditures were $311.0 million during the 39 weeks ended October 28, 2023, compared to $204.0 million during the 39 weeks ended October 29, 2022.

During the 39 weeks ended October 28, 2023, we opened 20 new stores, relocated five stores, and remodeled 16 stores, compared to the 39 weeks ended October 29, 2022, when we opened 35 new stores, relocated 11 stores, and remodeled eight stores.

The increase in net cash used in investing activities in the first 39 weeks of fiscal 2023 compared to the first 39 weeks of fiscal 2022 was primarily due to higher 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 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.

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.

The increase in net cash used in financing activities in the first 39 weeks of fiscal 2023 compared to the first 39 weeks of fiscal 2022 was primarily due to an increase in share repurchases, partially offset by borrowings on our revolving credit facility.

As of October 28, 2023, we had $195.4 million outstanding under the credit facility, and we had no borrowings outstanding under the credit facility as of January 28, 2023 and October 29, 2022.

Share repurchase program

13 unchanged sentences

JPMorgan Chase Bank, N.A., as Syndication Agent and a Lender;

PNC Bank, National Association, as Documentation Agent and a Lender;

PNC Bank, National Association,

as Documentation Agent and a Lender;

and the other lenders party thereto.

The Loan Agreement matures on March 11, 2025, provides maximum revolving loans equal to the lesser of $1.0 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.

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 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.

As of October 28, 2023, we had $195.4 million outstanding under the credit facility and the weighted average interest rate was 8.21%.

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

As of October 28, 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