What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-08-29 compared with 2024-05-30 · 62 added, 40 removed, 205 unchanged (33% of the section changed)

25 unchanged sentences

● a decline in operating results which could lead to asset impairment and store closure charges;

● other risk factors detailed in our public filings with the Securities and Exchange Commission (the SEC), including risk factors contained in Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the year ended February 3, 2024, as such may be amended or supplemented in our subsequently filed Quarterly Reports on Form 10-Q (including this report).

● other risk factors detailed in our public filings with the Securities and Exchange Commission, including risk factors contained in Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the year ended February 3, 2024, as such may be amended or supplemented in our subsequently filed Quarterly Reports on Form 10-Q (including this report).

Except to the extent required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

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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.

Current Trends

Industry trend s

Industry trends

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 2023 and into the first quarter of 2024, supported by healthy consumer engagement with the beauty category.

The overall beauty market expanded in 2023 and into the first 26 weeks of fiscal 2024, supported by on-going 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 2024, 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.

Persistent inflationary and macroeconomic pressures are impacting consumer spending habits broadly, which we believe may have contributed to lower sales trends through the first 26 weeks of fiscal 2024.

The continuation of inflationary and macroeconomic pressures could lead to a recession and further impact our ability to grow sales and maintain historical profitability levels.

In addition, inflation could cause the interest rates on any future debt to remain at an elevated level or increase.

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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 2024 and 2023 ended on May 4, 2024 and April 29, 2023, respectively.

The Company’s second quarter in fiscal 2024 and 2023 ended on August 3, 2024 and July 29, 2023, 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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13 Weeks Ended

26 Weeks Ended

(Percentage of net sales)

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Income tax expense

Comparison of 13 weeks ended May 4, 2024 to 13 weeks ended April 29, 2023

Net sales increased $91.6 million or 3.5%, to $2.7 billion for the 13 weeks ended May 4, 2024, compared to $2.6 billion for the 13 weeks ended April 29, 2023.

The net sales increase was primarily due to increased comparable sales, new store contribution, and an increase of $9.1 million in other revenue.

The total comparable sales increase of 1.6% was driven by a 1.3% increase in transactions and a 0.3% increase in average ticket.

Gross profit increased $14.9 million or 1.4%, to $1.07 billion for the 13 weeks ended May 4, 2024, compared to $1.05 billion for the 13 weeks ended April 29, 2023.

Gross profit as a percentage of net sales decreased to 39.2% for the 13 weeks ended May 4, 2024, compared to 40.0% for the 13 weeks ended April 29, 2023.

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

Comparison of 13 weeks ended August 3, 2024 to 13 weeks ended July 29, 2023

Net sales increased $22.3 million, or 0.9%, to $2.6 billion for the 13 weeks ended August 3, 2024 compared to $2.5 billion for the 13 weeks ended July 29, 2023.

The net sales increase was primarily due to new store contribution and a $5.7 million increase in other revenue.

The comparable sales decrease of 1.2% for the 13 weeks ended August 3, 2024 was driven by a 1.8% decrease in transactions and a 0.6% increase in average ticket.

Gross profit decreased $15.4 million, or 1.6%, to $978.2 million for the 13 weeks ended August 3, 2024, compared to $993.6 million for the 13 weeks ended July 29, 2023.

Gross profit as a percentage of net sales decreased to 38.3% for the 13 weeks ended August 3, 2024, compared to 39.3% for the 13 weeks ended July 29, 2023.

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

Selling, general and administrative expenses

Selling, general and administrative (SG&A) expenses increased $53.8 million or 8.8%, to $665.9 million for the 13 weeks ended May 4, 2024, compared to $612.1 million for the 13 weeks ended April 29, 2023.

SG&A expenses as a percentage of net sales increased to 24.4% for the 13 weeks ended May 4, 2024, compared to 23.2% for the 13 weeks ended April 29, 2023, primarily due to higher corporate overhead for strategic investments, higher store payroll and benefits, and higher store expenses.

Selling, general and administrative (SG&A) expenses increased $44.1 million or 7.3%, to $644.8 million for the 13 weeks ended August 3, 2024, compared to $600.7 million for the 13 weeks ended July 29, 2023.

SG&A expenses as a percentage of net sales increased to 25.3% for the 13 weeks ended August 3, 2024, compared to 23.7% for the 13 weeks ended July 29, 2023, primarily due to deleverage of store payroll and benefits, corporate overhead primarily due to strategic investments, store expenses, and marketing expenses, partially offset by lower incentive compensation.

Pre-opening expenses

Pre-opening expenses were $2.9 million for the 13 weeks ended May 4, 2024 compared to $0.7 million for the 13 weeks ended April 29, 2023.

Pre-opening expenses were $4.2 million for the 13 weeks ended August 3, 2024 compared to $1.3 million for the 13 weeks ended July 29, 2023.

Interest income, net

Interest income, net was $6.9 million for the 13 weeks ended May 4, 2024 compared to $7.3 million for the 13 weeks ended April 29, 2023.

We did not have any outstanding borrowings on the credit facility as of May 4, 2024, February 3, 2024, and April 29, 2023.

Interest income, net was $4.5 million for the 13 weeks ended August 3, 2024 compared to $4.4 million for the 13 weeks ended July 29, 2023.

We did not have any outstanding borrowings on the credit facility as of August 3, 2024, February 3, 2024, and July 29, 2023.

Income tax expense

Income tax expense of $94.7 million for the 13 weeks ended May 4, 2024 represents an effective tax rate of 23.2%, compared to $102.4 million of income tax expense representing an effective tax rate of 22.8% for the 13 weeks ended April 29, 2023.

The higher income tax rate is primarily due to a reduced benefit from income tax accounting for stock-based compensation.

Net income was $313.1 million for the 13 weeks ended May 4, 2024, compared to $347.1 million for the 13 weeks ended April 29, 2023.

The decrease in net income is primarily related to the $53.8 million increase in SG&A expenses and the $0.4 million decrease in interest income, net, partially offset by the $14.9 million increase in gross profit and the $7.6 million decrease in income tax expense.

Income tax expense of $81.2 million for the 13 weeks ended August 3, 2024 represents an effective tax rate of 24.3%, compared to $96.0 million of income tax expense representing an effective tax rate of 24.2% for the 13 weeks ended July 29, 2023.

Net income was $252.6 million for the 13 weeks ended August 3, 2024, compared to $300.1 million for the 13 weeks ended July 29, 2023.

The decrease in net income is primarily due to the $44.1 million increase in SG&A expenses, the $15.4 million decrease in gross profit, and the $2.9 million increase in pre-opening expenses, partially offset by the $14.8 million decrease in income taxes.

Comparison of 26 weeks ended August 3, 2024 to 26 weeks ended July 29, 2023

Net sales increased $113.9 million, or 2.2%, to $5.3 billion for the 26 weeks ended August 3, 2024, compared to $5.2 billion for the 26 weeks ended July 29, 2023.

The net sales increase was primarily due to new store contribution and a $14.8 million increase in other revenue.

The comparable sales increase of 0.2% for the 26 weeks ended August 3, 2024 was driven by a 0.4% increase in average ticket and a 0.2% decrease in transactions.

Gross profit was $2.0 billion for the 26 weeks ended August 3, 2024 compared to $2.0 billion for the 26 weeks ended July 29, 2023.

Gross profit as a percentage of net sales decreased to 38.8% for the 26 weeks ended August 3, 2024, compared to 39.7% for the 26 weeks ended July 29, 2023.

The decrease in gross profit margin was primarily due to lower merchandise margin and deleverage of store fixed costs, partially offset by growth in other revenue.

Selling, general and administrative expenses

SG&A expenses increased $97.9 million, or 8.1%, to $1.3 billion for the 26 weeks ended August 3, 2024, compared to $1.2 billion for the 26 weeks ended July 29, 2023.

SG&A expenses as a percentage of net sales increased to 24.8% for the 26 weeks ended August 3, 2024 compared to 23.5% for the 26 weeks ended July 29, 2023, primarily due to deleverage of corporate overhead primarily due to strategic investments, store payroll and benefits, store expenses, and marketing expenses, partially offset by lower incentive compensation.

Pre-opening expenses

Pre-opening expenses were $7.1 million for the 26 weeks ended August 3, 2024 compared to $1.9 million for the 26 weeks ended July 29, 2023.

Interest income, net

Interest income, net was $11.4 million for the 26 weeks ended August 3, 2024 compared to $11.8 million for the 26 weeks ended July 29, 2023.

We did not have any outstanding borrowings on the credit facility as of August 3, 2024, February 3, 2024, and July 29, 2023.

Income tax expense

Income tax expense of $175.9 million for the 26 weeks ended August 3, 2024 represents an effective tax rate of 23.7%, compared to $198.4 million of income tax expense representing an effective tax rate of 23.5% for the 26 weeks ended July 29, 2023.

Net income was $565.7 million for the 26 weeks ended August 3, 2024 compared to $647.2 million for the 26 weeks ended July 29, 2023.

The decrease in net income is primarily due to the $97.9 million increase in SG&A expenses and the $5.1 million increase in pre-opening expenses, partially offset by the $22.5 million decrease in income taxes.

Liquidity and capital resources

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

As of May 4, 2024, February 3, 2024, and April 29, 2023, we had cash and cash equivalents of $524.6 million, $766.6 million, and $636.4 million, respectively.

As of August 3, 2024, February 3, 2024, and July 29, 2023, we had cash and cash equivalents of $414.0 million, $766.6 million, and $388.6 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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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 2024 compared to the first quarter of fiscal 2023 was mainly due to the timing of accounts payable, accrued liabilities, accrued income taxes, and prepaid expenses and other current assets, the decrease in net income, and a larger increase in merchandise inventories in the first quarter of fiscal 2024, partially offset by the net decrease in other assets and liabilities.

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

Merchandise inventories, net were $1.9 billion at May 4, 2024, compared to $1.8 billion at April 29, 2023, representing an increase of $154.8 million or 8.8%.

The decrease in net cash provided by operating activities in the first 26 weeks of fiscal 2024 compared to the first 26 weeks of fiscal 2023 was mainly due to the timing of accounts payable, accrued liabilities, accrued income taxes, and prepaid expenses and other current assets, the decrease in net income, and a larger increase in merchandise inventories in the first 26 weeks of fiscal 2024, partially offset by a decrease in net other assets and liabilities.

Merchandise inventories, net were $2.0 billion at August 3, 2024 compared to $1.8 billion at July 29, 2023, representing an increase of $182.7 million or 10.1%.

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

● $72 million increase due to new brand launches;

● $46 million increase due to the addition of 36 net new stores opened since April 29, 2023;

● $22 million increase in distribution center inventory primarily due to the opening of the market fulfillment center in Greer, SC.

● $56 million increase primarily due to the opening of the new market fulfillment center in Greer, SC;

● $55 million increase due to the addition of 49 net new stores opened since July 29, 2023.

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.

Investing activities for capital expenditures were $91.0 million during the 13 weeks ended May 4, 2024 compared to $109.8 million during the 13 weeks ended April 29, 2023.

During the 13 weeks ended May 4, 2024, we opened 12 new stores, closed two stores, and relocated one store, compared to the 13 weeks ended April 29, 2023, when we opened five new stores, closed one store, remodeled two stores, and relocated one store.

The decrease in net cash used in investing activities in the first quarter of fiscal 2024 compared to the first quarter of fiscal 2023 was primarily due to lower capital expenditures for information technology systems and supply chain investments, partially offset by higher capital expenditures for merchandising fixtures, compared to the first quarter of fiscal 2023.

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 $186.3 million during the 26 weeks ended August 3, 2024, compared to $204.7 million during the 26 weeks ended July 29, 2023.

During the 26 weeks ended August 3, 2024, we opened 29 new stores, closed three stores, relocated two stores, and remodeled nine stores, compared to the 26 weeks ended July 29, 2023, when we opened eight new stores, closed one store, relocated three stores, and remodeled five stores.

The decrease in net cash used in investing activities in the first 26 weeks of fiscal 2024 compared to the first 26 weeks of fiscal 2023 was primarily due to lower capital expenditures for information technology systems and supply chain investments, partially offset by higher capital expenditures for new, remodeled, and relocated stores and merchandising fixtures, compared to the first 26 weeks of fiscal 2023.

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 2024 compared to the first quarter of fiscal 2023 was primarily due to an increase in share repurchases.

We had no borrowings outstanding under the credit facility as of May 4, 2024, February 3, 2024, and April 29, 2023.

The decrease in net cash used in financing activities in the first 26 weeks of fiscal 2024 compared to the first 26 weeks of fiscal 2023 was primarily due to a decrease in the dollar amount of share repurchases.

We had no borrowings outstanding under the credit facility as of August 3, 2024, February 3, 2024, and July 29, 2023.

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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The Loan Agreement matures on March 13, 2029, provides maximum revolving loans equal to the lesser of $800.0 million 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 $200.0 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.

Substantially all of the Company’s assets are pledged as collateral for outstanding borrowings under the Loan

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 0.5% to 1.0% or the Term Secured Overnight Financing Rate plus a margin of 1.5% to 2.0%, and a credit spread adjustment of 0.10%, with such margins based on the Company’s borrowing availability, and the unused line fee is 0.25% to 0.375% per annum.

As of May 4, 2024, February 3, 2024, and April 29, 2023 we had no borrowings outstanding under the credit facility.

As of May 4, 2024, we were in compliance with all terms and covenants of the Loan Agreement.

As of August 3, 2024, February 3, 2024, and July 29, 2023, we had no borrowings outstanding under the credit facility.

As of August 3, 2024, 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