What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-12-05 compared with 2024-08-29 · 72 added, 69 removed, 198 unchanged (42% of the section changed)

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Key aspects of our business include:

a differentiated assortment of approximately 25,000 beauty products across a variety of categories and price points as well as a variety of beauty services, including salon services, in more than 1,400 stores predominantly located in convenient, high-traffic locations;

a differentiated assortment of approximately 25,000 beauty and wellness products across a variety of categories and price points as well as a variety of beauty services, including salon services, in more than 1,400 stores predominantly located in convenient, high-traffic locations;

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

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

The continued growth of our business and any future increases in net sales, net income, and cash flows is dependent on our ability to execute our strategic priorities:

1) drive breakthrough and disruptive growth through an expanded definition of All Things Beauty;

2) evolve the omnichannel experience through connected physical and digital ecosystems, All In Your World;

3) expand and deepen our presence across the beauty journey, positioning Ulta Beauty at the Heart of the Beauty Community;

4) drive operational excellence and optimization;

5) protect and cultivate our world-class culture and talent;

and 6) expand our environmental and social impact.

We believe the attractive and growing U.S.

beauty products and salon services industry, the expanding definition of beauty and the role that omnichannel capabilities play in consumers’ lives, coupled with Ulta Beauty’s competitive strengths, position us to capture additional market share in the industry.

The continued growth of our business and any future increases in net sales, net income, and cash flows is dependent on our ability to execute our strategic priorities across four foundational focus areas:

1) Assortment:

curating the best of all things beauty and wellness for all beauty enthusiasts;

2) Experience:

fostering authentic, empowering human connections that inspire, delight and engage guests at every touchpoint;

engaging our guests wherever they want to shop by expanding our reach through seamless and immersive omnichannel experiences;

and 4) Loyalty:

building lifelong loyalty and brand love through member growth and personalization.

We operate in an attractive and growing U.S.

beauty products and salon services industry, and believe our strong operating model, competitive advantages, and financial foundation, paired with our investments to drive our growth, position us to capture additional market share in the industry.

Comparable sales is a key metric that is monitored closely within the retail industry.

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economic conditions, changes in merchandise strategy or mix, and timing and effectiveness of our marketing activities, among others.

Over the long term, our growth strategy is to increase total net sales through 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.

with successful e-commerce and competitive omnichannel capabilities.

Over the long term, our growth strategy is to drive profitable growth and market share leadership in beauty and wellness 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 drive revenue growth, leverage fixed costs, improve merchandise margin, increase operating efficiencies, and grow other revenue, partially offset by incremental investments in new stores and technology to enhance the guest experience, people, assortment, advertising, and depreciation.

Current Trends

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Impact of inflation and other macroeconomic trends

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.

Persistent inflationary and macroeconomic pressures have impacted consumer spending habits broadly, which we believe may have contributed to lower sales trends through the first 39 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.

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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 2024 and 2023 ended on August 3, 2024 and July 29, 2023, respectively.

The Company’s third quarter in fiscal 2024 and 2023 ended on November 2, 2024 and October 28, 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:

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Income tax expense

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.

Comparison of 13 weeks ended November 2, 2024 to 13 weeks ended October 28, 2023

Net sales increased $41.2 million, or 1.7%, to $2.53 billion for the 13 weeks ended November 2, 2024 compared to $2.49 billion for the 13 weeks ended October 28, 2023.

The net sales increase was primarily due to new store contribution, partially offset by a $4.9 million decline in other revenue.

The comparable sales increase of 0.6% for the 13 weeks ended November 2, 2024 was driven by a 0.5% increase in transactions and a 0.1% increase in average ticket.

Gross profit increased $13.6 million, or 1.4%, to $1.0 billion for the 13 weeks ended November 2, 2024, compared to $992.1 million for the 13 weeks ended October 28, 2023.

Gross profit as a percentage of net sales decreased to 39.7% for the 13 weeks ended November 2, 2024, compared to 39.9% for the 13 weeks ended October 28, 2023.

The decrease in gross profit margin was primarily due to deleverage of store and supply chain fixed costs and lower other revenue, partially offset by favorable channel mix and lower inventory shrink.

Selling, general and administrative 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.

Selling, general and administrative (SG&A) expenses increased $20.9 million, or 3.2%, to $682.3 million for the 13 weeks ended November 2, 2024, compared to $661.4 million for the 13 weeks ended October 28, 2023.

SG&A expenses as a percentage of net sales increased to 27.0% for the 13 weeks ended November 2, 2024, compared to 26.6% for the 13 weeks ended October 28, 2023, primarily due to deleverage of store payroll and benefits and corporate overhead, primarily due to strategic investments, partially offset by lower incentive compensation.

Pre-opening expenses

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.

Pre-opening expenses were $4.9 million for the 13 weeks ended November 2, 2024 compared to $3.5 million for the 13 weeks ended October 28, 2023.

Interest income, net

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.

Interest income, net was $1.7 million for the 13 weeks ended November 2, 2024 compared to $2.5 million for the 13 weeks ended October 28, 2023.

As of November 2, 2024 and October 28, 2023, we had $199.7 million and $195.4 million, respectively, outstanding under the credit facility.

We did not have any outstanding borrowings on the credit facility as of February 3, 2024.

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.

Income tax expense of $78.0 million for the 13 weeks ended November 2, 2024 represents an effective tax rate of 24.4%, compared to $80.2 million of income tax expense representing an effective tax rate of 24.3% for the 13 weeks ended October 28, 2023.

Net income was $242.2 million for the 13 weeks ended November 2, 2024, compared to $249.5 million for the 13 weeks ended October 28, 2023.

The decrease in net income is primarily due to the $20.9 million increase in SG&A expenses and the $1.4 million increase in pre-opening expenses, partially offset by the $13.6 million increase in gross profit and the $2.2 million decrease in income taxes.

Comparison of 39 weeks ended November 2, 2024 to 39 weeks ended October 28, 2023

Net sales increased $155.0 million, or 2.0%, to $7.8 billion for the 39 weeks ended November 2, 2024, compared to $7.7 billion for the 39 weeks ended October 28, 2023.

The net sales increase was primarily due to new store contribution and

a $10.0 million increase in other revenue.

The comparable sales increase of 0.3% for the 39 weeks ended November 2, 2024 was driven by a 0.3% increase in average ticket.

Gross profit was $3.1 billion for the 39 weeks ended November 2, 2024 compared to $3.0 billion for the 39 weeks ended October 28, 2023.

Gross profit as a percentage of net sales decreased to 39.1% for the 39 weeks ended November 2, 2024, compared to 39.7% for the 39 weeks ended October 28, 2023.

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

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.

SG&A expenses increased $118.8 million, or 6.3%, to $2.0 billion for the 39 weeks ended November 2, 2024, compared to $1.9 billion for the 39 weeks ended October 28, 2023.

SG&A expenses as a percentage of net sales increased to 25.5% for the 39 weeks ended November 2, 2024, compared to 24.5% for the 39 weeks ended October 28, 2023, primarily due to deleverage of corporate overhead due to strategic investments and deleverage of store payroll and benefits, and store 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.

Pre-opening expenses were $12.0 million for the 39 weeks ended November 2, 2024 compared to $5.4 million for the 39 weeks ended October 28, 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.

Interest income, net was $13.1 million for the 39 weeks ended November 2, 2024 compared to $14.3 million for the 39 weeks ended October 28, 2023.

As of November 2, 2024 and October 28, 2023, we had $199.7 million and $195.4 million, respectively, outstanding under the credit facility.

We did not have any outstanding borrowings on the credit facility as of February 3, 2024.

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.

Income tax expense of $253.9 million for the 39 weeks ended November 2, 2024 represents an effective tax rate of 23.9%, compared to $278.6 million of income tax expense representing an effective tax rate of 23.7% for the 39 weeks ended October 28, 2023.

Net income was $807.8 million for the 39 weeks ended November 2, 2024 compared to $896.6 million for the 39 weeks ended October 28, 2023.

The decrease in net income is primarily due to the $118.8 million increase in SG&A expenses and the $6.6 million increase in pre-opening expenses, partially offset by the $24.7 million decrease in income taxes and the $13.1 million increase in gross profit.

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 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.

As of November 2, 2024, February 3, 2024, and October 28, 2023, we had cash and cash equivalents of $177.8 million, $766.6 million, and $121.8 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 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;

● $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.

The decrease in net cash provided by operating activities in the first 39 weeks of fiscal 2024 compared to the first 39 weeks of fiscal 2023 was mainly due to the decrease in net income, the timing of accrued income taxes, prepaid expenses and other current assets, accrued liabilities, accounts payable, and deferred revenue, partially offset by a lower increase in merchandise inventories in the first 39 weeks of fiscal 2024, a decrease in net other assets and liabilities, and an increase in depreciation and amortization.

Merchandise inventories, net were $2.4 billion at November 2, 2024 compared to $2.3 billion at October 28, 2023, representing an increase of $43.9 million or 1.9%.

The increase in total inventory is primarily due to the addition of 63 net new stores opened since October 28, 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 $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.

Investing activities for capital expenditures were $300.5 million during the 39 weeks ended November 2, 2024, compared to $311.0 million during the 39 weeks ended October 28, 2023.

During the 39 weeks ended November 2, 2024, we opened 57 new stores, closed five stores, relocated two stores, and remodeled 36 stores, compared to the 39 weeks ended October 28, 2023, when we opened 20 new stores, closed one store, relocated five stores, and remodeled 16 stores.

The decrease in net cash used in investing activities in the first 39 weeks of fiscal 2024 compared to the first 39 weeks of fiscal 2023 was primarily due to lower capital expenditures for information technology systems, supply chain

investments, and store maintenance, partially offset by higher capital expenditures for new, remodeled, and relocated stores and merchandising fixtures, compared to the first 39 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.

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The decrease in net cash used in financing activities in the first 39 weeks of fiscal 2024 compared to the first 39 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.

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.

As of November 2, 2024 and October 28, 2023, we had $199.7 million and $195.4 million, respectively, outstanding under the credit facility.

We did not have any outstanding borrowings on the credit facility as of February 3, 2024.

Share repurchase program

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The 2022 Share Repurchase Program did not have an expiration date but provided for suspension or discontinuation at any time.

In March 2024, the Board of Directors authorized a new share repurchase program (the 2024 Share Repurchase Program) pursuant to which the Company may repurchase up to $2.0 billion of the Company’s common stock.

The 2024 Share Repurchase Program authorization revokes the previously authorized but unused amounts from the 2022 Share Repurchase Program.

The 2024 Share Repurchase Program does not have an expiration date and may be suspended or discontinued at any time.

In March 2024, the Board of Directors authorized a share repurchase program (the March 2024 Share Repurchase Program) pursuant to which the Company could repurchase up to $2.0 billion of the Company’s common stock.

The March 2024 Share Repurchase Program authorization revoked the previously authorized but unused amounts from the 2022 Share Repurchase Program.

The March 2024 Share Repurchase Program did not have an expiration date but provided for suspension or discontinuation at any time.

In October 2024, the Board of Directors authorized a new share repurchase program (the October 2024 Share Repurchase Program) pursuant to which the Company may repurchase up to $3.0 billion of the Company’s common stock.

The October 2024 Share Repurchase Program authorization revokes the previously authorized but unused amounts from the March 2024 Share Repurchase Program.

The October 2024 Share Repurchase Program does not have an expiration date and may be suspended or discontinued at any time.

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

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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 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.

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 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.

As of November 2, 2024 and October 28, 2023, we had $199.7 million and $195.4 million, respectively, outstanding under the credit facility.

The weighted average interest rate was 7.15% and 8.21% for the 39 weeks ended November 2, 2024 and October 28, 2023, respectively.

As of February 3, 2024, we had no borrowings outstanding under the credit facility.

As of November 2, 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