What changed in this filing

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Item 7. Management’s Discussion and Analysis

2025-03-27 compared with 2024-03-26 · 80 added, 85 removed, 264 unchanged (38% of the section changed)

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We define our target consumer as a beauty enthusiast, a consumer who is passionate about the beauty category, uses beauty for self-expression, experimentation, and self-investment, and has high expectations for the shopping experience.

We estimate beauty enthusiasts represent approximately 65% of shoppers and 80% of beauty products and services spend in the U.S.

We estimate there are approximately 140 million beauty enthusiasts in the U.S.

We believe our strategy provides us with the competitive advantages that have contributed to our financial performance.

Today, we are the largest specialty beauty retailer in the United States and the premier beauty destination for cosmetics, fragrance, skin care products, hair care products, and salon services.

Today, we are the largest specialty beauty retailer in the United States and the premier beauty destination for cosmetics, fragrance, skin care products, hair care products, wellness products, and salon services.

Key aspects of our business include:

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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;

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

and 4) Access:

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

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

Industry trend s

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 in 2023, supported by healthy consumer engagement with the

beauty category.

The overall beauty market expanded in 2023 and 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 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.

Persistent inflationary and macroeconomic pressures have impacted consumer spending habits broadly, which we believe may have contributed to lower sales trends throughout fiscal 2024.

The continuation of inflationary and macroeconomic pressures could 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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● the location of new stores in existing store markets;

● competition;

● competition / alternative distribution channels;

● our ability to respond on a timely basis to changes in consumer preferences;

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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 represents interest 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.

Interest income represents interest 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.

Interest expense includes interest costs and facility fees associated with our credit facility, which is structured as an asset-based lending instrument.

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Our fiscal years are the 52- or 53-week periods ending on the Saturday closest to January 31.

The Company’s fiscal years ended February 3, 2024 (fiscal 2023), January 28, 2023 (fiscal 2022), and January 29, 2022 (fiscal 2021) were 53, 52, and 52 week years, respectively.

The Company’s fiscal years ended February 1, 2025 (fiscal 2024), February 3, 2024 (fiscal 2023), and January 28, 2023 (fiscal 2022) were 52, 53, and 52 week years, respectively.

As of February 1, 2025, we operated 1,445 stores across 50 states.

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Operating income

Interest (income) expense, net

Interest income, net

Income before income taxes

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Other operating data:

Number of stores end of year

Number of stores end of period

Comparable sales

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Net sales increased $88.4 million, or 0.8%, to $11.3 billion in fiscal 2024 compared to $11.2 billion in fiscal 2023.

The net sales increase was primarily due to increased comparable sales, strong new store performance, an increase of $68.3 million in other revenue and the benefit of an extra week of sales in fiscal 2023.

The net sales increase was primarily due to new store performance, increased comparable sales, and an increase of $3.7 million in other revenue, partially offset by the benefit of an extra week of sales in fiscal 2023.

Net sales for the 53 rd week of fiscal 2023 were approximately $181.9 million.

The total comparable sales increase of 0.7% in fiscal 2024, was driven by a 1.1% increase in average ticket and a 0.4% decrease in transactions.

The total comparable sales increase in fiscal 2023 was 5.7%.

Gross profit increased $6.2 million, or 0.1%, to $4.39 billion in fiscal 2024, compared to $4.38 billion in fiscal 2023.

Gross profit as a percentage of net sales decreased 30 basis points to 38.8% in fiscal 2024 compared to 39.1% in fiscal 2023.

The decrease in gross profit margin was primarily due to:

● 40 basis points of deleverage in merchandise margins driven by lapping favorable price increase impacts from the prior year and higher promotional activity;

● 20 basis points of deleverage of store fixed costs driven by more net new store openings;

● 10 basis points of deleverage due to higher supply chain costs;

partially offset by

● 20 basis points of leverage in inventory shrink;

● 20 basis points of leverage due to favorable channel mix.

Selling, general and administrative expenses

SG&A expenses increased $114.0 million, or 4.2%, to $2.8 billion in fiscal 2024 compared to $2.7 billion in fiscal 2023.

As a percentage of net sales, SG&A expenses increased 90 basis points to 24.9% in fiscal 2024 compared to 24.0% in fiscal 2023.

The deleverage of SG&A expenses was primarily due to:

● 60 basis points of deleverage of store payroll and benefits due to wage investments;

● 40 basis points of deleverage of corporate overhead primarily due to strategic investments;

● 10 basis points of deleverage of store expenses due to ongoing inflationary pressures;

partially offset by

● 20 basis points of leverage due to lower incentive compensation.

Pre-opening expenses

Pre-opening expenses increased $5.2 million, or 60.9%, to $13.7 million in fiscal 2024 compared to $8.5 million in fiscal 2023.

Interest income, net

Net interest income was $15.1 million in fiscal 2024 compared to $17.6 million in fiscal 2023, due to lower average cash balances.

We did not have any outstanding borrowings on our credit facility as of February 1, 2025 and February 3, 2024.

Income tax expense

Income tax expense of $378.9 million in fiscal 2024 represents an effective tax rate of 24.0%, compared to fiscal 2023 income tax expense of $404.6 million and an effective tax rate of 23.9%.

Net income decreased $89.9 million to $1.2 billion in fiscal 2024 compared to $1.3 billion in fiscal 2023.

The decrease in net income was primarily due to a $114.0 million increase in SG&A expenses and a $5.2 million increase in pre-opening expenses, partially offset by a $25.7 million decrease in income taxes and a $6.2 million increase in gross profit.

Fiscal year 2023 versus fiscal year 2022

Net sales increased $998.7 million, or 9.8%, to $11.2 billion in fiscal 2023 compared to $10.2 billion in fiscal 2022.

Net sales for the 53 rd week of fiscal

2023 were approximately $181.9 million.

The total comparable sales increase of 5.7% in fiscal 2023, compared to an increase of 15.6% in fiscal 2022, was driven by a 7.4% increase in transactions and a 1.5% decrease in average ticket.

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The increase in net income was primarily due to a $336.6 million increase in gross profit, partially offset by a $299.3 million increase in SG&A expenses and a $3.5 million increase in income taxes.

Fiscal year 2022 versus fiscal year 2021

Net sales increased $1.6 billion, or 18.3%, to $10.2 billion in fiscal 2022 compared to $8.6 billion in fiscal 2021.

The net sales increase was primarily due to the favorable impact from the continued resilience of the beauty category, retail price increases, the impact of new brands and product innovation, increased social occasions and fewer COVID-19 limitations compared to fiscal 2021, and an increase of $77.3 million in other revenue.

The total comparable sales increase of 15.6% in fiscal 2022, compared to an increase of 37.9% in fiscal 2021, was driven by a 10.8% increase in transactions and a 4.3% increase in average ticket.

Gross profit increased $676.0 million, or 20.1%, to $4.0 billion in fiscal 2022, compared to $3.4 billion in fiscal 2021.

Gross profit as a percentage of net sales increased 60 basis points to 39.6% in fiscal 2022 compared to 39.0% in fiscal 2021.

The increase in gross profit margin was primarily due to:

● 100 basis points of leverage of fixed costs attributed to the impact of higher sales and ongoing occupancy cost optimization efforts;

● 60 basis points of leverage in other revenue primarily due to credit card income growth, an increase in royalty income from our partnership with Target, and higher loyalty point redemptions;

● 20 basis points of leverage due to favorable channel mix shifts;

partially offset by

● 70 basis points of deleverage in inventory shrink;

● 50 basis points of deleverage in merchandise margins driven by brand mix and lapping benefits from favorable inventory reserve adjustments in fiscal 2021, partially offset by the timing of retail price changes.

Selling, general and administrative expenses

SG&A expenses increased $333.8 million, or 16.2%, to $2.4 billion in fiscal 2022 compared to $2.1 billion in fiscal 2021.

As a percentage of net sales, SG&A expenses decreased 40 basis points to 23.5% in fiscal 2022 compared to 23.9% in fiscal 2021.

The leverage of SG&A expenses was primarily due to:

● 80 basis points of leverage due to lower marketing expenses;

● 20 basis points of leverage of incentive compensation due to higher sales;

partially offset by

● 40 basis points of deleverage of corporate overhead primarily due to strategic investments;

● 20 basis points of deleverage of store payroll and benefits due to wage investments.

Pre-opening expenses

Pre-opening expenses increased $1.1 million, or 11.4%, to $10.6 million in fiscal 2022 compared to $9.5 million in fiscal 2021.

Interest (income) expense, net

Interest income, net was $4.9 million in fiscal 2022 compared to $1.7 million of interest expense, net in fiscal 2021.

Interest income represents interest from cash equivalents and short-term investments with maturities of twelve months or less from the date of purchase.

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

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

Income tax expense

Income tax expense of $401.1 million in fiscal 2022 represents an effective tax rate of 24.4%, compared to fiscal 2021 income tax expense of $310.0 million and an effective tax rate of 23.9%.

The higher income tax expense is primarily due

to less tax benefit from the income tax accounting for share-based compensation and an increase in state tax expense compared to fiscal 2021.

Net income increased $256.6 million to $1.2 billion in fiscal 2022 compared to $985.8 million in fiscal 2021.

The increase in net income was primarily due to a $676.0 million increase in gross profit, partially offset by a $333.8 million increase in SG&A expenses and a $91.1 million increase 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 February 3, 2024 and January 28, 2023, we had cash and cash equivalents of $766.6 million and $737.9 million, respectively.

As of February 1, 2025 and February 3, 2024, we had cash and cash equivalents of $703.2 million and $766.6 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 fiscal 2023 compared to fiscal 2022 is mainly due to the timing of accrued liabilities, accounts payable, receivable collections, prepaid income taxes, and prepaid expenses and other current assets and a larger increase in merchandise inventories in fiscal 2023, partially offset by the increase in net income and non-cash lease expense.

Merchandise inventories, net were $1.7 billion at February 3, 2024, compared to $1.6 billion at January 28, 2023, representing an increase of $138.7 million or 8.6%.

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

Merchandise inventories, net were $2.0 billion at February 1, 2025, compared to $1.7 billion at February 3, 2024, representing an increase of $226.1 million or 13.0%.

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

● $69 million increase due to new key brand launches;

● $36 million increase due to the addition of 30 net new stores opened since January 28, 2023;

● $15 million increase primarily due to inventory cost increases;

● $13 million increase in distribution center inventory primarily due to the opening of the new market fulfillment center in Greer, SC.

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

The increase in non-cash lease expense was primarily due to an increase in tenant allowances.

The increase in net cash provided by operating activities in fiscal 2022 relative to fiscal 2021 was primarily due to the increase in net income, a smaller increase in merchandise inventories in fiscal 2022 compared to fiscal 2021, and the timing of receivable collections, partially offset by the timing of payables and a smaller increase in deferred revenue compared to fiscal 2021.

● $131 million increase due to new key brand launches and inventory investments;

● $95 million increase due to the addition of 60 net new stores opened since February 3, 2024.

The decrease in net income was primarily due to an increase in SG&A expenses and pre-opening expenses, partially offset by a decrease in income taxes and an increase in gross profit.

Investing activities

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Investment activities for capital expenditures were $374.5 million during fiscal 2024, compared to $435.3 million during fiscal 2023.

The decrease in net cash used in investing activities in fiscal 2024 relative to fiscal 2023 was primarily due to less capital expenditures for information technology systems and supply chain, partially offset by more capital expenditures for new, remodeled, and relocated stores compared to fiscal 2023.

The increase in net cash used in investing activities in fiscal 2023 relative to fiscal 2022 was primarily due to more capital expenditures for new, remodeled, and relocated stores and information technology systems compared to fiscal 2022.

The increase in net cash used in investing activities in fiscal 2022 relative to fiscal 2021 was primarily due to more capital expenditures for new, remodeled, and relocated stores, supply chain, and information technology systems compared to fiscal 2021.

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 fiscal 2024 relative to fiscal 2023 was primarily due to an increase in share repurchases.

The increase in net cash used in financing activities in fiscal 2023 relative to fiscal 2022 was primarily due to an increase in share repurchases and less stock options exercised.

The decrease in net cash used in financing activities in fiscal 2022 relative to fiscal 2021 was primarily due to a decrease in share repurchases.

We had no borrowings outstanding under the credit facility at the end of fiscal 2024, 2023, and 2022.

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In March 2022, the Board of Directors authorized a share repurchase program (the 2022 Share Repurchase Program) pursuant to which the Company could repurchase up to $2.0 billion of the Company’s common stock.

The 2020 Share Repurchase Program authorization revoked the previously authorized but unused amounts from the earlier share repurchase program.

The 2020 Share Repurchase Program did not have an expiration date but provided for suspension or discontinuation at any time.

The 2022 Share Repurchase Program authorization revoked the previously authorized but unused amounts from the 2020 Share Repurchase Program.

The 2022 Share Repurchase Program revoked the previously authorized but unused amounts from the earlier share repurchase program.

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 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 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 revoked 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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Total cost of shares repurchased

On March 12, 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.

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.

Credit facility

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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 February 3, 2024 and January 28, 2023, we had no borrowings outstanding under the credit facility and we were in compliance with all terms and covenants of the Loan Agreement.

As of February 1, 2025 and February 3, 2024, we had no borrowings outstanding under the credit facility and we were in compliance with all terms and covenants of the Loan Agreement.

Our business is subject to seasonal fluctuation.

Significant portions of our net sales and profits are realized during the fourth quarter of the fiscal year due to the holiday selling season.

To a lesser extent, our business is also affected by Mother’s Day and Valentine’s Day.

To a lesser extent, our business is also affected by

Mother’s Day and Valentine’s Day.

Any decrease in sales during these higher sales volume periods could have an adverse effect on our business, financial condition, or operating results for the entire fiscal year.

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We estimate the amount recorded as a reduction of inventory at the end of each period based on a detailed analysis of inventory turns and management’s analysis of the facts and circumstances of the various contractual agreements with vendors.

We record cash consideration expected to be received from vendors in

We record cash consideration expected to be received from vendors in receivables.

We do not believe there is a reasonable likelihood there will be a material change in the future estimates or assumptions we use to calculate our reduction of inventory.

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Variations in the actual outcome of these future tax consequences could materially impact our consolidated financial statements.

Recently adopted accounting pronouncements

See Note 2 to our consolidated financial statements, “Summary of significant accounting policies – Recently adopted accounting pronouncements.”

Recent accounting pronouncements not yet adopted

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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-K

Item 7. Management’s Discussion and Analysis