e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
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þ |
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Quarterly Period Ended May 2, 2009
or
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o |
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission File Number: 001-33764
ULTA SALON, COSMETICS & FRAGRANCE, INC.
(Exact name of Registrant as specified in its charter)
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Delaware
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36-3685240 |
(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.) |
1000 Remington Blvd., Suite 120 |
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Bolingbrook, Illinois
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60440 |
(Address of principal executive offices)
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(Zip code) |
Registrants telephone number, including area code: (630) 410-4800
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes o
No o
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definition of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
The number of shares of the registrants common stock, par value $0.01 per share, outstanding as of
June 4, 2009 was 57,779,793 shares.
ULTA SALON, COSMETICS & FRAGRANCE, INC.
TABLE OF CONTENTS
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14 |
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2
Part I Financial Information
Item 1. Financial Statements
Ulta Salon, Cosmetics & Fragrance, Inc.
Balance Sheets
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May 2, |
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January 31, |
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May 3, |
(In thousands) |
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2009 |
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2009 |
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2008 |
(unaudited) |
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(unaudited) |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
3,840 |
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$ |
3,638 |
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$ |
3,975 |
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Receivables, net |
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12,392 |
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18,268 |
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19,533 |
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Merchandise inventories, net |
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230,286 |
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213,602 |
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212,564 |
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Prepaid expenses and other current assets |
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24,200 |
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24,294 |
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22,435 |
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Prepaid income taxes |
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5,890 |
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8,628 |
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Deferred income taxes |
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8,195 |
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8,278 |
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9,129 |
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Total current assets |
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284,803 |
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276,708 |
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267,636 |
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Property and equipment, net |
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286,140 |
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292,224 |
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255,123 |
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Deferred income taxes |
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4,080 |
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Total assets |
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$ |
570,943 |
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$ |
568,932 |
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$ |
526,839 |
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Liabilities and stockholders equity |
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Current liabilities: |
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Current portion notes payable |
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$ |
12,534 |
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$ |
18,000 |
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$ |
18,143 |
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Accounts payable |
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53,500 |
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47,811 |
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66,508 |
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Accrued liabilities |
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43,757 |
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51,202 |
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49,618 |
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Accrued income taxes |
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6,872 |
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Total current liabilities |
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109,791 |
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117,013 |
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141,141 |
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Notes payable less current portion |
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88,047 |
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88,047 |
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86,391 |
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Deferred rent |
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104,168 |
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101,288 |
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80,411 |
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Deferred income taxes |
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17,616 |
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17,616 |
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Total liabilities |
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319,622 |
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323,964 |
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307,943 |
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Commitments and contingencies (note 3)
See accompanying notes to financial statements.
3
Ulta Salon, Cosmetics & Fragrance, Inc.
Balance Sheets (continued)
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May 2, |
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January 31, |
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May 3, |
(In thousands, except per share data) |
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2009 |
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2009 |
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2008 |
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(unaudited) |
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(unaudited) |
Stockholders equity: |
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Common stock, $.01 par value, 400,000 shares
authorized; 58,254, 58,245 and 57,780 shares
issued; 57,749, 57,740 and 57,275 shares
outstanding; at May 2, 2009 (unaudited),
January 31, 2009 and May 3, 2008
(unaudited), respectively |
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$ |
583 |
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$ |
582 |
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$ |
578 |
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Treasury stock-common, at cost |
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(4,179 |
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(4,179 |
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(4,179 |
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Additional paid-in capital |
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294,377 |
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293,052 |
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287,922 |
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Accumulated deficit |
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(38,936 |
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(43,856 |
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(64,849 |
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Accumulated other comprehensive loss |
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(524 |
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(631 |
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(576 |
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Total stockholders equity |
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251,321 |
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244,968 |
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218,896 |
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Total liabilities and stockholders equity |
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$ |
570,943 |
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$ |
568,932 |
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$ |
526,839 |
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See accompanying notes to financial statements.
4
Ulta Salon, Cosmetics & Fragrance, Inc.
Statements of Income
(unaudited)
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Three months ended |
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May 2, |
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May 3, |
(In thousands, except per share data) |
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2009 |
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2008 |
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Net sales |
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$ |
268,825 |
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$ |
239,298 |
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Cost of sales |
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189,482 |
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165,377 |
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Gross profit |
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79,343 |
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73,921 |
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Selling, general and administrative expenses |
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69,194 |
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62,065 |
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Pre-opening expenses |
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1,195 |
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3,772 |
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Operating income |
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8,954 |
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8,084 |
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Interest expense |
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671 |
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915 |
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Income before income taxes |
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8,283 |
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7,169 |
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Income tax expense |
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3,363 |
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2,894 |
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Net income |
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$ |
4,920 |
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$ |
4,275 |
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Net income per common share: |
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Basic |
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$ |
0.09 |
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$ |
0.08 |
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Diluted |
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$ |
0.08 |
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$ |
0.07 |
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Weighted average common shares outstanding: |
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Basic |
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57,743 |
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56,956 |
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Diluted |
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58,750 |
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58,980 |
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See accompanying notes to financial statements.
5
Ulta Salon, Cosmetics & Fragrance, Inc.
Statements of Cash Flows
(unaudited)
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Three months ended |
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May 2, |
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May 3, |
(In thousands) |
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2009 |
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2008 |
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Operating activities |
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Net income |
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$ |
4,920 |
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$ |
4,275 |
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Adjustments to reconcile net income to net cash
provided by (used in) operating activities: |
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Depreciation and amortization |
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15,365 |
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12,018 |
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Non-cash stock compensation charges |
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1,295 |
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591 |
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Excess tax benefits from stock-based
compensation |
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(1,083 |
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Loss on disposal of property and equipment |
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39 |
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127 |
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Change in operating assets and liabilities: |
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Receivables |
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5,876 |
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1,110 |
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Merchandise inventories |
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(16,684 |
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(36,455 |
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Prepaid expenses and other assets |
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94 |
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(3,251 |
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Income taxes |
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2,738 |
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1,808 |
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Accounts payable |
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5,689 |
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14,386 |
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Accrued liabilities |
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(4,255 |
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(4,119 |
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Deferred rent |
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2,880 |
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9,176 |
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Net cash provided by (used in) operating activities |
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17,957 |
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(1,417 |
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Investing activities |
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Purchases of property and equipment |
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(12,320 |
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(30,545 |
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Net cash used in investing activities |
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(12,320 |
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(30,545 |
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Financing activities |
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Proceeds on long-term borrowings |
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284,284 |
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289,238 |
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Payments on long-term borrowings |
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(289,750 |
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(259,474 |
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Proceeds from issuance of common stock under
stock plans |
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31 |
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1,360 |
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Excess tax benefits from stock-based compensation |
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1,083 |
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Initial public offering issuance costs |
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(59 |
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Net cash (used in) provided by financing activities |
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(5,435 |
) |
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32,148 |
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Net increase in cash and cash equivalents |
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202 |
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186 |
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Cash and cash equivalents at beginning of period |
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3,638 |
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3,789 |
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Cash and cash equivalents at end of period |
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$ |
3,840 |
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$ |
3,975 |
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See accompanying notes to financial statements.
6
Ulta Salon, Cosmetics & Fragrance, Inc.
Statements of Cash Flows (continued)
(unaudited)
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Three months ended |
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May 2, |
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May 3, |
(In thousands) |
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2009 |
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2008 |
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Supplemental cash flow information |
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Cash paid for interest |
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$ |
723 |
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$ |
1,006 |
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Cash paid for income taxes |
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$ |
625 |
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$ |
3 |
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Noncash investing and financing activities: |
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Change in property and equipment included in
accrued liabilities |
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$ |
(3,000 |
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$ |
334 |
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Unrealized gain on interest rate swap hedge,
net of tax |
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$ |
107 |
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$ |
143 |
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See accompanying notes to financial statements.
7
Ulta Salon, Cosmetics & Fragrance, Inc.
Statement of Stockholders Equity
(unaudited)
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Treasury - |
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Accumulated |
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Common Stock |
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Common Stock |
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Additional |
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Other |
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Total |
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Issued |
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Treasury |
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Paid-In |
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Accumulated |
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Comprehensive |
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Stockholders |
(In thousands, except per share data) |
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Shares |
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Amount |
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Shares |
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Amount |
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Capital |
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Deficit |
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Loss |
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Equity |
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Balance January 31, 2009 |
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58,245 |
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$ |
582 |
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(505 |
) |
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$ |
(4,179 |
) |
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$ |
293,052 |
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$ |
(43,856 |
) |
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$ |
(631 |
) |
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$ |
244,968 |
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Common stock options exercised |
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9 |
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1 |
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30 |
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31 |
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Unrealized gain on interest rate swap hedge,
net of $83 income tax |
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107 |
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107 |
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Net income for the three months ended May 2, 2009 |
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4,920 |
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4,920 |
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Comprehensive income |
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5,027 |
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Stock compensation charge |
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1,295 |
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1,295 |
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Balance May 2, 2009 |
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58,254 |
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|
$ |
583 |
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|
|
(505 |
) |
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$ |
(4,179 |
) |
|
$ |
294,377 |
|
|
$ |
(38,936 |
) |
|
$ |
(524 |
) |
|
$ |
251,321 |
|
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|
|
See accompanying notes to financial statements.
8
Ulta Salon, Cosmetics & Fragrance, Inc.
Notes to Financial Statements
(unaudited)
1. Business and basis of presentation
The Company was incorporated in the state of Delaware on January 9, 1990, to operate specialty
retail stores selling cosmetics, fragrance, haircare and skincare products, and related accessories
and services. The stores also feature full-service salons. As of May 2, 2009, the Company operated
320 stores in 36 states, as shown in the table below:
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Number of |
State |
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stores |
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Alabama |
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7 |
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Arizona |
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24 |
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Arkansas |
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1 |
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California |
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30 |
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Colorado |
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|
11 |
|
Delaware |
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1 |
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Florida |
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22 |
|
Georgia |
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16 |
|
Illinois |
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31 |
|
Indiana |
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6 |
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Iowa |
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2 |
|
Kansas |
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1 |
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Kentucky |
|
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2 |
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Louisiana |
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2 |
|
Maryland |
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6 |
|
Massachusetts |
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|
4 |
|
Michigan |
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|
9 |
|
Minnesota |
|
|
6 |
|
Missouri |
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|
3 |
|
Nebraska |
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|
2 |
|
Nevada |
|
|
6 |
|
New Jersey |
|
|
10 |
|
New York |
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|
10 |
|
North Carolina |
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|
13 |
|
Ohio |
|
|
6 |
|
Oklahoma |
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6 |
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Oregon |
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|
3 |
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Pennsylvania |
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|
13 |
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Rhode Island |
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1 |
|
South Carolina |
|
|
4 |
|
Tennessee |
|
|
3 |
|
Texas |
|
|
42 |
|
Utah |
|
|
2 |
|
Virginia |
|
|
9 |
|
Washington |
|
|
4 |
|
Wisconsin |
|
|
2 |
|
|
|
|
|
|
Total |
|
|
320 |
|
The accompanying unaudited financial statements and related notes have been prepared in accordance
with U.S. generally accepted accounting principles (GAAP) for interim financial information and
with the instructions to Form 10-Q and the U.S. Securities and Exchange Commissions Article 10,
Regulation S-X. In the opinion of management, the accompanying financial statements reflect all
adjustments, which are of a normal recurring nature, necessary to fairly state the financial
position and results of operations and cash flows for the interim periods presented.
The Companys business is subject to seasonal fluctuation. Significant portions of the Companys
net sales and net income are realized during the fourth quarter of the fiscal year due to the
holiday selling season. The results for the three months ended May 2, 2009 and May 3, 2008 are not
necessarily indicative of the results to be expected for the fiscal year ending January 30, 2010,
or for any other future interim period or for any future year.
These interim financial statements and the related notes should be read in conjunction with the
financial statements and notes included in the Companys Annual Report on Form 10-K for the year
ended January 31, 2009. All amounts are stated in thousands, with the exception of per share
amounts and number of stores.
Reverse stock split
On September 17, 2007, the Companys board of directors approved a resolution to effect a reverse
stock split of the Companys common stock pursuant to which each share of common stock was to be
converted into 0.632 of one share of common stock. The reverse stock split became effective on
October 22, 2007. Any fractional shares resulting from the reverse stock split were rounded to the
nearest whole share. Common share and per share amounts for all periods presented and the
conversion ratio of preferred to common shares have been adjusted for the 0.632 for 1 reverse stock
split.
9
Initial public offering
On October 30, 2007, the Company completed an initial public offering in which the Company sold
7,667 shares of common stock resulting in net proceeds of $123,549 after deducting underwriting
discounts and commissions and offering expenses. Selling stockholders sold approximately 2,154
additional shares of common stock. The Company did not receive any proceeds from the sale of shares
by the selling stockholders. The Company used the net proceeds from the offering to pay $93,012 of
accumulated dividends in arrears on the Companys preferred stock, which satisfied all amounts due
with respect to accumulated dividends, $4,792 to redeem the Companys Series III preferred stock,
and $25,745 to reduce the Companys borrowings under its third amended and restated loan and
security agreement and for general corporate purposes. Also in connection with the offering, the
Company converted preferred shares into 41,524 common shares and restated the par value of its
common stock to $0.01 per share.
2. Summary of significant accounting policies
Information regarding the Companys significant accounting policies is contained in Note 2,
Summary of significant accounting policies, to the financial statements in the Companys Annual
Report on Form 10-K for the year ended January 31, 2009. Presented below in this and the following
notes is supplemental information that should be read in conjunction with Notes to financial
statements in the Annual Report.
Fiscal quarter
The Companys quarterly periods are the 13 weeks ending on the Saturday closest to April 30, July
31, October 31, and January 31. The Companys first quarters in fiscal 2009 and 2008 ended on May
2, 2009 and May 3, 2008, respectively.
Reclassifications
Certain reclassifications have been made to the first quarter 2008 operating activities in the
statements of cash flows to separately present income taxes to conform to the first quarter 2009
presentation.
Share-based compensation
The Company accounts for share-based compensation in accordance with Statement of Financial
Accounting Standards (SFAS) No. 123(R), Share-Based Payment. Pursuant to SFAS 123(R), share-based
compensation cost is measured at grant date, based on the fair value of the award, and is
recognized as expense over the requisite service period for awards expected to vest. The Company
estimated the grant date fair value of stock options using a Black-Scholes valuation model using
the following assumptions for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
May 2, 2009 |
|
May 3, 2008 |
|
|
|
Volatility rate |
|
|
58.0 |
% |
|
|
50.7 |
% |
Average risk-free interest rate |
|
|
2.5 |
% |
|
|
1.8 |
% |
Average expected life (in years) |
|
|
6.3 |
|
|
|
4.7 |
|
Dividend yield |
|
None |
|
None |
The Company granted 76 and 1,101 stock options during the three months ended May 2, 2009 and May 3,
2008, respectively. The weighted-average grant date fair value of these options was $3.57 and
$5.18, respectively.
The Company recorded stock compensation expense of $1,295 and $591 for the three months ended May
2, 2009 and May 3, 2008, respectively. At May 2, 2009, there was approximately $11,428 of
unrecognized compensation expense related to unvested options.
10
Comprehensive income
Comprehensive income is comprised of net income and gains and losses from derivative instruments
designated as cash flow hedges, net of income tax. Total comprehensive income is as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
May 2, |
|
May 3, |
|
|
2009 |
|
2008 |
|
|
|
Net income |
|
$ |
4,920 |
|
|
$ |
4,275 |
|
Unrealized gain on interest rate swap hedge, net of income tax |
|
|
107 |
|
|
|
143 |
|
|
|
|
Comprehensive income |
|
$ |
5,027 |
|
|
$ |
4,418 |
|
|
|
|
3. Commitments and contingencies
Leases The Company leases stores, distribution and office facilities, and certain equipment.
Original non-cancelable lease terms range from three to ten years, and store leases generally
contain renewal options for additional years. A number of the Companys store leases provide for
contingent rentals based upon sales. Contingent rent amounts were insignificant in the three months
ended May 2, 2009 and May 3, 2008. Total rent expense under operating leases was $17,936 and
$15,459 for the three months ended May 2, 2009 and May 3, 2008, respectively.
Securities litigation In December 2007 and January 2008, three putative securities class action
lawsuits were filed against the Company and certain of its current and then-current executive
officers in the United States District Court for the Northern District of Illinois. Each suit
alleges that the prospectus and registration statement filed pursuant to the Companys initial
public offering contained materially false and misleading statements and failed to disclose
material facts. Each suit claims violations of Sections 11, 12(a)(2) and/or 15 of the Securities
Act of 1933, and the two later filed suits added claims under Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, as well as the associated Rule 10b-5. In February 2008, two of the
plaintiffs filed competing motions to consolidate the actions and appoint lead plaintiffs and lead
plaintiffs counsel. On March 18, 2008, after one of the plaintiffs withdrew his motion, the suits
were consolidated and plaintiffs in the Mirsky v. ULTA action were appointed lead plaintiffs. Lead
plaintiffs filed their amended complaint on May 19, 2008. The amended complaint alleges no new
violations of the securities laws not asserted in the prior complaints. It adds no new defendants
and drops one of the then-current officers as a defendant. On July 21, 2008, Defendants filed a
motion to dismiss the Amended Complaint. On September 24, 2008, Lead Plaintiffs filed their
opposition to the motion to dismiss, and on October 24, 2008, Defendants filed their reply
memorandum in support of their motion to dismiss. On March 19, 2009, Defendants motion to dismiss
was denied.
On May 29, 2009, the Company and its primary insurance carrier engaged in a mediation with counsel
representing the putative class. Although defendants continue to deny plaintiffs allegations, in
the interest of putting this matter behind it, the Company and its insurer have reached a tentative
settlement with plaintiffs, subject to agreement on comprehensive settlement documentation and
approval by the Court. All amounts to be paid under the tentative settlement will be paid out of
proceeds of the Companys directors and officers liability insurance coverage.
General litigation The Company is also involved in various legal proceedings that are incidental
to the conduct of its business, including, but not limited to, employment related claims. In the
opinion of management, the amount of any liability with respect to these proceedings, either
individually or in the aggregate, will not be material.
4. Notes payable
The Companys credit facility is with LaSalle Bank National Association as the administrative
agent, Wachovia Capital Finance Corporation as collateral agent, and JP Morgan Chase Bank as
documentation agent. This facility provides maximum credit of $200,000 through May 31, 2011. The
credit facility agreement contains a restrictive financial covenant requiring the Company to
maintain tangible net worth of not less than $80,000. On May 2, 2009, the Companys tangible net
worth was approximately $251,000. Substantially all of the Companys assets are pledged as
collateral for outstanding borrowings under the facility. Outstanding borrowings bear interest at
the prime rate or the Eurodollar rate plus 1.00% up to $100,000 and 1.25% thereafter. The advance
rates on owned inventory are 80% (85% from September 1 to January 31).
The weighted-average interest rate on the outstanding borrowings as of May 2, 2009 and January 31,
2009, was 1.48% and 1.52%, respectively. At May 2, 2009, the Company had $100,581 of outstanding
borrowings under the facility. The Company has classified
11
$88,047 as long-term as this is the minimum amount that the Company believes will remain
outstanding for an uninterrupted period over the next year. The Company had approximately $93,531
and $86,764 of availability as of May 2, 2009 and January 31, 2009, respectively.
The Company has an ongoing letter of credit that renews annually in October, the balance of which
was $326 as of May 2, 2009 and January 31, 2009.
5. Financial instruments
The Company is exposed to certain risks relating to its ongoing business operations. The primary
risk managed by using derivative instruments is interest rate risk. Interest rate swaps are entered
into to manage interest rate risk associated with the Companys variable-rate borrowings. The
Company accounts for derivative financial instruments in accordance with SFAS No. 133, Accounting
for Derivative Instruments and Certain Hedging Activities, as amended.
On February 1, 2009, the Company adopted SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities an amendment of SFAS No. 133. The adoption had no impact on amounts
recognized in the Companys financial statements. SFAS No. 161 is intended to help investors better
understand how derivative instruments and hedging activities affect an entitys financial position,
financial performance and cash flows through enhanced disclosure requirements. The enhanced
disclosures primarily surround disclosing the objectives and strategies for using derivative
instruments by their underlying risk as well as a tabular format of the fair values of the
derivative instruments and their gains and losses.
On January 31, 2007, the Company entered into an interest rate swap agreement with a notional
amount of $25,000 that qualified as a cash flow hedge to obtain a fixed interest rate on variable
rate debt and reduce certain exposures to interest rate fluctuations. The swap results in fixed
rate payments at an interest rate of 5.11% for a term of three years.
The Company does not hold or issue interest rate swap agreements for trading purposes. In the event
that a counter-party fails to meet the terms of the interest rate swap agreement, the Companys
exposure is limited to the interest rate differential. The Company manages the credit risk of
counterparties by dealing only with institutions that the Company considers financially sound. The
Company considers the risk of non-performance to be remote.
The Companys derivative financial instrument is designated and qualifies as a cash flow hedge.
Accordingly, the effective portion of the gain or loss on the derivative instrument is reported as
a component of accumulated other comprehensive loss and reclassified into interest expense in the
same period or periods during which the hedged transaction affects earnings. The remaining gain or
loss, the ineffective portion, on the derivative instrument, if other than inconsequential, is
recognized in interest expense during the period of change. The following table summarizes the fair
value and presentation within the balance sheets for derivatives designated as hedging instruments
under SFAS No. 133:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Liabilities |
|
|
May 2, 2009 |
|
January 31, 2009 |
|
|
(unaudited) |
|
|
|
|
Balance Sheet |
|
|
|
|
|
Balance Sheet |
|
|
|
|
Location |
|
Fair Value |
|
Location |
|
Fair Value |
Interest rate swap liability |
|
Accrued liabilities |
|
$ |
852 |
|
|
Accrued liabilities |
|
$ |
1,042 |
|
The following table presents the impact of derivatives in SFAS No. 133 cash flow hedging
relationships and their location within the unaudited statements of income and accumulated other
comprehensive loss (AOCL):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain |
|
Amount of Gain |
|
Amount of Gain |
|
|
Recognized in |
|
Reclassfied from |
|
Recognized in Income |
|
|
AOCL on Derivative |
|
AOCL into Income |
|
on Derivative |
|
|
(Effective Portion) |
|
(Effective Portion) |
|
(Ineffective Portion) |
|
|
Three months ended |
|
Three months ended |
|
Three months ended |
|
|
May 2, |
|
May 3, |
|
May 2, |
|
May 3, |
|
May 2, |
|
May 3, |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
Interest rate swap, net of tax |
|
$ |
107 |
|
|
$ |
143 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
12
6. Fair Value Measurements
On February 3, 2008, the Company adopted SFAS No. 157, Fair Value Measurements, for financial
assets and liabilities. The adoption had no impact on the Companys financial statements. SFAS No.
157 established a three-tier hierarchy for fair value measurements, which prioritizes the inputs
used in measuring fair value as follows:
|
|
|
Level 1 observable inputs such as quoted prices for identical instruments in active
markets. |
|
|
|
|
Level 2 inputs other than quoted prices in active markets that are observable either
directly or indirectly through corroboration with observable market data. |
|
|
|
|
Level 3 unobservable inputs in which there is little or no market data, which would
require the Company to develop its own assumptions. |
As of May 2, 2009, the Company held certain liabilities that are required to be measured at fair
value on a recurring basis. These included the Companys interest rate swap agreement and certain
liabilities associated with the Companys non-qualified deferred compensation plan. The fair value
of the Companys interest rate swap agreement is determined based on inputs that are readily
available in public markets or can be derived from information available in publicly quoted
markets. Therefore, the Company has categorized the interest rate swap as Level 2. The fair value
of the Companys liabilities associated with its non-qualified deferred compensation plan is based
primarily on third-party reported net asset values, which is primarily based on quoted market
prices of the underlying assets of the funds and have been categorized as Level 2. The following
table presents the Companys financial liabilities as of May 2, 2009 measured at fair value on a
recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurement using |
|
|
|
|
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
|
|
|
|
|
|
Deferred compensation liabilities |
|
$ |
|
|
|
$ |
90 |
|
|
$ |
|
|
|
|
|
|
Interest rate swap liability |
|
$ |
|
|
|
$ |
852 |
|
|
$ |
|
|
|
|
|
|
7. Net income per common share
The following is a reconciliation of net income and the number of shares of common stock used in
the computation of net income per basic and diluted share:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
May 2, |
|
May 3, |
|
|
2009 |
|
2008 |
|
|
|
Net income |
|
$ |
4,920 |
|
|
$ |
4,275 |
|
|
|
|
|
|
|
|
|
|
Denominator for basic net income per share
weighted-average common shares |
|
|
57,743 |
|
|
|
56,956 |
|
Dilutive effect of stock options |
|
|
1,007 |
|
|
|
2,024 |
|
|
|
|
Denominator for diluted net income per share |
|
|
58,750 |
|
|
|
58,980 |
|
|
|
|
|
|
|
|
|
|
Net income per common share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.09 |
|
|
$ |
0.08 |
|
Diluted |
|
$ |
0.08 |
|
|
$ |
0.07 |
|
The denominators for diluted net income per common share for the three months ended May 2, 2009 and
May 3, 2008 exclude 3,481 and 2,217 employee stock options, respectively, due to their
anti-dilutive effects.
13
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should
be read in conjunction with our financial statements and related notes included elsewhere in this
quarterly report. This discussion contains forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934 and the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, which reflect our current views with respect to, among other things,
future events and financial performance. You can identify these forward-looking statements by the
use of forward-looking words such as outlook, believes, expects, plans, estimates, or
other comparable words. Any forward-looking statements contained in this Form 10-Q are based upon
our historical performance and on current plans, estimates and expectations. The inclusion of this
forward-looking information should not be regarded as a representation by us or any other person
that the future plans, estimates or expectations contemplated by us will be achieved. Such
forward-looking statements are subject to various risks and uncertainties, which include, without
limitation: the impact of weakness in the economy; changes in the overall level of consumer
spending; changes in the wholesale cost of our products; the possibility that we may be unable to
compete effectively in our highly competitive markets; the possibility that our continued opening
of new stores could strain our resources and have a material adverse effect on our business and
financial performance; the possibility that new store openings may be impacted by developer or
co-tenant issues; the possibility that the capacity of our distribution and order fulfillment
infrastructure may not be adequate to support our recent growth and expected future growth plans;
the possibility of material disruptions to our information systems; weather conditions that could
negatively impact sales and other risk factors detailed in our public filings with the Securities
and Exchange Commission (the SEC), including risk factors contained in our Annual Report on Form
10-K for the year ended January 31, 2009. We assume no obligation to update any forward-looking
statements as a result of new information, future events or developments. References in the
following discussion to we, us, our, the Company, Ulta and similar references mean Ulta
Salon, Cosmetics & Fragrance, Inc. unless otherwise expressly stated or the context otherwise
requires.
Overview
We were founded in 1990 as a discount beauty retailer at a time when prestige, mass and salon
products were sold through separate distribution channels. In 1999 we embarked on a multi-year
strategy to understand and embrace what women want in a beauty retailer and transform Ulta into the
shopping experience that it is today. We pioneered what we believe to be our unique combination of
beauty superstore and specialty store attributes. We believe our strategy provides us with the
competitive advantages that have contributed to our strong financial performance.
We are currently the largest beauty retailer that provides one-stop shopping for prestige, mass and
salon products and salon services in the United States. We combine the unique elements of a beauty
superstore with the distinctive environment and experience of a specialty retailer. Key aspects of
our beauty superstore strategy include our ability to offer our customers a broad selection of over
21,000 beauty products across the categories of cosmetics, fragrance, haircare, skincare, bath and
body products and salon styling tools, as well as salon haircare products. We focus on delivering a
compelling value proposition to our customers across all of our product categories. Our stores are
conveniently located in high-traffic, primarily off-mall locations such as power centers and
lifestyle centers with other destination retailers. As of May 2, 2009, we operated 320 stores
across 36 states. In addition to these fundamental elements of a beauty superstore, we strive to
offer an uplifting shopping experience through what we now refer to as The Five Es: Escape,
Education, Entertainment, Esthetics and Empowerment.
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 growth strategy, including growing our store base,
expanding our prestige brand offerings, driving incremental salon traffic, expanding our online
business and continuing to enhance our brand awareness. We believe that the steadily expanding U.S.
beauty products and services industry, the shift in distribution of prestige beauty products from
department stores to specialty retail stores, coupled with Ultas competitive strengths, positions
us to capture additional market share in the industry through successful execution of our growth
strategy.
Comparable store sales is a key metric that is monitored closely within the retail industry. We do
not expect our future comparable store sales increases to reflect the levels experienced in prior
periods. This is due in part to the difficulty in improving on such significant increases in
subsequent periods and the current economic environment.
Over the long-term, our growth strategy is to increase total net sales through increases in our
comparable store sales and by opening new stores. Gross profit as a percentage of net sales is
expected to be relatively consistent with historical rates given our planned distribution
infrastructure investments and the impact of the rate of new store growth. We plan to continue to
improve our operating results by leveraging our fixed costs and decreasing our selling, general and
administrative expenses, as a percentage of our net sales.
14
Global economic conditions
Recent global market and economic conditions have been unprecedented and challenging with tighter
credit conditions and recession in most major economies continuing in 2009. As a result of these
market conditions, the cost and availability of credit has been and may continue to be adversely
affected by illiquid credit markets and wider credit spreads. Concern about the stability of the
markets generally and the strength of counterparties specifically has led many lenders and
institutional investors to reduce, and in some cases, cease to provide credit to businesses and
consumers. These factors have led to a decrease in spending by businesses and consumers alike, and
a corresponding decrease in global infrastructure spending. Continued turbulence in the United
States and international markets and economies and prolonged declines in business and consumer
spending may adversely affect our liquidity and financial condition, and the liquidity and
financial condition of our customers, including our ability to refinance maturing liabilities and
access the capital markets to meet liquidity needs.
Basis of presentation
Net sales include store and e-commerce merchandise sales as well as salon service revenue. Salon
service revenue represents less than 10% of our combined product sales and services revenues and
therefore, these revenues are combined with product sales. We recognize merchandise revenue at the
point of sale (POS) in our retail stores and the time of shipment in the case of Internet sales.
Merchandise sales are recorded net of estimated returns. Salon service revenue is recognized at the
time the service is provided. Gift card sales revenue is deferred until the customer redeems the
gift card. Company coupons and other incentives are recorded as a reduction of net sales.
Comparable store sales reflect sales for stores beginning on the first day of the 14th month of
operation. Therefore, a store is included in our comparable store base on the first day of the
period after one year of operations plus the initial one month grand opening period. Non-comparable
store sales include sales from new stores that have not yet completed their 13th month of operation
and stores that were closed for part or all of the period in either year as a result of remodel
activity. Remodeled stores are included in comparable store sales unless the store was closed for a
portion of the current or prior period. There may be variations in the way in which some of our
competitors and other retailers calculate comparable or same store sales. As a result, data herein
regarding our comparable store sales may not be comparable to similar data made available by our
competitors or other retailers.
Comparable store sales is a critical measure that allows us to evaluate the performance of our
store base as well as several other aspects of our overall strategy. Several factors could
positively or negatively impact our comparable store sales results:
|
|
|
the general national, regional and local economic conditions and corresponding impact on
customer spending levels; |
|
|
|
|
the introduction of new products or brands; |
|
|
|
|
the location of new stores in existing store markets; |
|
|
|
|
competition; |
|
|
|
|
our ability to respond on a timely basis to changes in consumer preferences; |
|
|
|
|
the effectiveness of our various marketing activities; and |
|
|
|
|
the number of new stores opened and the impact on the average age of all of our
comparable stores. |
Cost of sales includes:
|
|
|
the cost of merchandise sold, including all vendor allowances, which are treated as a
reduction of merchandise costs; |
|
|
|
|
warehousing and distribution costs including labor and related benefits, freight, rent,
depreciation and amortization, real estate taxes, utilities, and insurance; |
|
|
|
|
store occupancy costs including rent, depreciation and amortization, real estate taxes,
utilities, repairs and maintenance, insurance, licenses, and cleaning expenses; |
15
|
|
|
salon payroll and benefits; and |
|
|
|
|
shrink and inventory valuation reserves. |
Our cost of sales may be negatively impacted as we open an increasing number of stores. Changes in
our merchandise mix may also have an impact on cost of sales.
This presentation of items included in cost of sales may not be comparable to the way in which our
competitors or other retailers compute their cost of sales.
Selling, general and administrative expenses include:
|
|
|
payroll, bonus and benefit costs for retail and corporate employees; |
|
|
|
|
advertising and marketing costs; |
|
|
|
|
occupancy costs related to our corporate office facilities; |
|
|
|
|
public company expense including Sarbanes-Oxley compliance expenses; |
|
|
|
|
stock-based compensation expense related to option grants which will result in increases
in expense as we implemented a structured stock option compensation program in 2007; |
|
|
|
|
depreciation and amortization for all assets except those related to our retail and
warehouse operations, which is included in cost of sales; and |
|
|
|
|
legal, finance, information systems and other corporate overhead costs. |
This presentation of items in selling, general and administrative expenses may not be comparable to
the way in which our competitors or other retailers compute their selling, general and
administrative expenses.
Pre-opening expense includes non-capital expenditures during the period prior to store opening for
new and remodeled stores including store set-up labor, management and employee training, and grand
opening advertising. Pre-opening expenses also includes rent during the construction period related
to new stores.
Interest expense includes interest costs associated with our credit facility, which is structured
as an asset based lending instrument. Our interest expense will fluctuate based on the seasonal
borrowing requirements associated with acquiring inventory in advance of key holiday selling
periods and fluctuation in the variable interest rates we are charged on outstanding balances. Our
credit facility is used to fund seasonal inventory needs and new and remodel store capital
requirements in excess of our cash flow from operations. Our credit facility interest is based on a
variable interest rate structure which can result in increased cost in periods of rising interest
rates.
Income tax expense reflects the federal statutory tax rate and the weighted average state statutory
tax rate for the states in which we operate stores.
Results of operations
Our quarterly periods are the 13 weeks ending on the Saturday closest to April 30, July 31, October
31, and January 31. The Companys first quarters in fiscal 2009 and 2008 ended on May 2, 2009 and
May 3, 2008, 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.
16
The following tables present the components of our results of operations for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Three months ended |
|
|
|
May 2, |
|
|
May 3, |
|
|
May 2, |
|
|
May 3, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
(Dollars in thousands) |
|
|
(Percentage of net sales) |
|
Net sales |
|
$ |
268,825 |
|
|
$ |
239,298 |
|
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of sales |
|
|
189,482 |
|
|
|
165,377 |
|
|
|
70.5 |
% |
|
|
69.1 |
% |
|
|
|
|
|
Gross profit |
|
|
79,343 |
|
|
|
73,921 |
|
|
|
29.5 |
% |
|
|
30.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
69,194 |
|
|
|
62,065 |
|
|
|
25.7 |
% |
|
|
25.9 |
% |
Pre-opening expenses |
|
|
1,195 |
|
|
|
3,772 |
|
|
|
0.4 |
% |
|
|
1.6 |
% |
|
|
|
|
|
Operating income |
|
|
8,954 |
|
|
|
8,084 |
|
|
|
3.3 |
% |
|
|
3.4 |
% |
Interest expense |
|
|
671 |
|
|
|
915 |
|
|
|
0.2 |
% |
|
|
0.4 |
% |
|
|
|
|
|
Income before income taxes |
|
|
8,283 |
|
|
|
7,169 |
|
|
|
3.1 |
% |
|
|
3.0 |
% |
Income tax expense |
|
|
3,363 |
|
|
|
2,894 |
|
|
|
1.3 |
% |
|
|
1.2 |
% |
|
|
|
|
|
Net income |
|
$ |
4,920 |
|
|
$ |
4,275 |
|
|
|
1.8 |
% |
|
|
1.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number stores end of period |
|
|
320 |
|
|
|
265 |
|
|
|
|
|
|
|
|
|
Comparable store sales (decrease) increase |
|
|
(2.3 |
)% |
|
|
3.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During fiscal 2008, we experienced a deceleration of our comparable store sales. Our comparable
store increases for the first, second and third quarters of fiscal 2008 were 3.9%, 3.7%, and 2.0%,
respectively, while our fourth quarter comparable store sales decreased 5.5% resulting in a full
year comparable store sales increase of 0.2%. We believe that the deterioration of the U.S.
economy was the primary contributing factor to our comparable store sales deceleration throughout
fiscal 2008.
Comparison of three months ended May 2, 2009 to three months ended May 3, 2008
Net sales
Net sales increased $29.5 million, or 12.3%, to $268.8 million for the three months ended May 2,
2009, compared to $239.3 million for the three months ended May 3, 2008. The increase is primarily
due to an additional 55 net new stores operating since first quarter 2008. Non-comparable stores
contributed $34.7 million to net sales while comparable stores contributed negative $5.2 million to
net sales.
Our comparable store sales decreased 2.3%, which included a 2.0% increase in traffic offset by a
4.3% decrease in average ticket. We attribute the decrease in comparable store sales primarily to
the continuing difficult economic environment and its negative impact on consumer spending.
Gross profit
Gross profit increased $5.4 million, or 7.3%, to $79.3 million for the three months ended May 2,
2009, compared to $73.9 million for the three months ended May 3, 2008. Gross profit as a
percentage of net sales decreased 140 basis points to 29.5% for the three months ended May 2, 2009,
compared to 30.9% for the three months ended May 3, 2008. The 140 basis point decrease in gross
margin rate was primarily driven by expected de-leverage in fixed store occupancy costs resulting
from the acceleration of our new store program over the last twelve months. We also planned a 50
basis point investment in margin rate during the quarter compared to the prior year to drive
customer traffic and market share in a difficult retail environment. This incremental investment
was offset by improved efficiencies in our distribution and transportation network including the
opening of our Phoenix, Arizona distribution center.
17
Selling, general and administrative expenses
Selling, general and administrative (SG&A) expenses increased $7.1 million, or 11.5%, to $69.2
million for the three months ended May 2, 2009, compared to $62.1 million for the three months
ended May 3, 2008. As a percentage of net sales, SG&A expenses decreased 20 basis points to 25.7%
for the three months ended May 2, 2009, compared to 25.9% for the three months ended May 3, 2008. A
70 basis point increase in advertising expense during the quarter was offset by improved leverage
in corporate overhead and variable store expenses as compared to the prior year period.
Pre-opening expenses
Pre-opening expenses decreased $2.6 million, or 68.3%, to $1.2 million for the three months ended
May 2, 2009, compared to $3.8 million for the three months ended May 3, 2008. During the three
months ended May 2, 2009, we opened 9 new stores, compared to 17 new store openings and 1 remodeled
store during the three months ended May 3, 2008.
Interest expense
Interest expense was $0.7 million for the three months ended May 2, 2009, compared to $0.9 million
for the three months ended May 3, 2008. The increase in our average debt outstanding on our credit
facility was offset by a decline in our weighted-average interest rate compared to the same period
last year.
Income tax expense
Income tax expense of $3.4 million for the three months ended May 2, 2009 represents an effective
tax rate of 40.6%, compared to $2.9 million of tax expense representing an effective tax rate of
40.4% for the three months ended May 3, 2008.
Net income
Net income increased $0.6 million, or 15.1%, to $4.9 million for the three months ended May 2,
2009, compared to $4.3 million for the three months ended May 3, 2008. The increase is primarily
related to the $5.4 million increase in gross profit and a $2.6 million decrease in pre-opening
expenses, partially offset by a $7.1 million increase in SG&A expenses.
Liquidity and capital resources
Our primary cash needs are for capital expenditures for new, relocated and remodeled stores,
increased merchandise inventories related to store expansion, and for continued improvement in our
information technology systems.
Our primary sources of liquidity are cash flows from operations, changes in working capital, and
borrowings under our credit facility. The most significant component of our working capital is
merchandise inventories reduced by related accounts payable and accrued expenses. Our working
capital position benefits from the fact that we generally collect cash from sales to customers the
same day, or within several days of the related sale, while we typically have up to 30 days to pay
our vendors.
Our working capital needs are greatest from August through November each year as a result of our
inventory build-up during this period for the approaching holiday season. This is also the time of
year when we are at maximum investment levels in our new store class and have not yet collected
landlord allowances due us as part of our lease agreements. Based on past performance and current
expectations, we believe that cash generated from operations and borrowings under the credit
facility will satisfy the Companys working capital needs, capital expenditure needs, commitments,
and other liquidity requirements through at least the next 12 months.
18
The following table presents a summary of our cash flows for the three months ended May 2, 2009 and
May 3, 2008:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
May 2, |
|
May 3, |
(In thousands) |
|
2009 |
|
2008 |
|
Net cash provided by (used in) operating activities |
|
$ |
17,957 |
|
|
$ |
(1,417 |
) |
Net cash used in investing activities |
|
|
(12,320 |
) |
|
|
(30,545 |
) |
Net cash (used in) provided by financing activities |
|
|
(5,435 |
) |
|
|
32,148 |
|
|
|
|
Net increase in cash and cash equivalents |
|
$ |
202 |
|
|
$ |
186 |
|
|
|
|
Operating activities
Operating activities consist of net income adjusted for certain non-cash items, including
depreciation and amortization, non-cash stock-based compensation, excess tax benefits from
stock-based compensation, realized losses on disposal of property and equipment, and the effect of
working capital changes.
Merchandise inventories were $230.3 million at May 2, 2009, an increase of $17.7 million compared
to May 3, 2008. The increase is primarily related to the addition of 55 net new stores opened since
May 3, 2008. Average inventory per store at May 2, 2009 decreased approximately 4.8% compared to
May 3, 2008 after adjusting for the inventory build in our Phoenix, Arizona distribution center
which opened in April 2008.
Income taxes were prepaid by $5.9 million at May 2, 2009, compared to $8.6 million at January 31,
2009. The change of $2.7 million related to first quarter 2009 activity. In May 2009, we received
an expected $8.0 million income tax refund related to certain tax planning changes adopted in
fiscal 2008.
Deferred rent liabilities were $104.2 million at May 2, 2009, an increase of $23.8 million compared
to May 3, 2008. Deferred rent includes deferred construction allowances, future rental increases
and rent holidays which are all recognized on a straight-line basis over their respective lease
term. The increase is due to activity since May 3, 2008 which includes 55 net new stores.
Investing activities
We have historically used cash primarily for new and remodeled stores as well as investments in
information technology systems. Investment activities relate to capital expenditures and were
$12.3 million during the three months ended May 2, 2009, compared to $30.5 million during the three
months ended May 3, 2008. Capital expenditures were higher during the three months ended May 3,
2008 due to the addition of a second distribution center and the number of new store openings (9
new stores were opened during first quarter 2009, compared to 17 new stores during first quarter
2008).
Financing activities
Financing activities consist principally of draws and payments on our credit facility and capital
stock transactions. The decrease in net cash provided by financing
activities of $37.6 million in
first quarter 2009 compared to first quarter 2008 is primarily the result of increased payments on
long-term borrowings.
Credit facility
Our credit facility is with LaSalle Bank National Association as the administrative agent, Wachovia
Capital Finance Corporation as collateral agent, and JP Morgan Chase Bank as documentation agent.
This facility provides maximum credit of $200 million through May 31, 2011. The credit facility
agreement contains a restrictive financial covenant requiring us to maintain tangible net worth of
not less than $80 million. On May 2, 2009, our tangible net worth was approximately $251 million.
Substantially all of our assets are pledged as collateral for outstanding borrowings under the
facility. Outstanding borrowings bear interest at the prime rate or the Eurodollar rate plus 1.00%
up to $100 million and 1.25% thereafter. The advance rates on owned inventory are 80% (85% from
September 1 to January 31).
The interest rate on the outstanding balances under the facility as of May 2, 2009 and January 31,
2009 was 1.48% and 1.52%, respectively. At May 2, 2009, we had $100.6 million of outstanding
borrowings under the facility. We have classified $88.0 million as
19
long-term as this is the minimum
amount we believe will remain outstanding for an uninterrupted period over the next year. We had
approximately $93.5 million and $86.8 million of availability as of May 2, 2009 and January 31,
2009, respectively. We also have an ongoing letter of credit that renews annually which had a
balance of $0.3 million as of May 2, 2009 and January 31, 2009.
Off-balance sheet arrangements
Our off-balance sheet arrangements consist of operating lease obligations and letters of credit. We
do not have any non-cancelable purchase commitments as of May 2, 2009. Our letters of credit
outstanding under our revolving credit facility were $0.3 million as of May 2, 2009.
Contractual obligations
Our contractual obligations consist of operating lease obligations and our revolving line of
credit. No material changes outside the ordinary course of business have occurred in our
contractual obligations during the three months ended May 2, 2009.
Critical accounting policies and estimates
Managements discussion and analysis of financial condition and results of operations is based upon
our financial statements, which have been prepared in accordance with GAAP. The preparation of
these financial statements required the use of estimates and judgments that affect the reported
amounts of our assets, liabilities, revenues and expenses. Management bases estimates on historical
experience and other assumptions it believes to be reasonable under the circumstances and evaluates
these estimates on an on-going basis. Actual results may differ from these estimates. There have
been no significant changes to the critical accounting policies and estimates included in our
Annual Report on Form 10-K for the year ended January 31, 2009.
Share-based compensation
We account for share-based compensation in accordance with Statement of Financial Accounting
Standards (SFAS) No. 123(R), Share-Based Payment. Pursuant to SFAS No. 123(R), share-based
compensation cost is measured at grant date, based on the fair value of the award, and is
recognized as expense over the requisite service period for awards expected to vest.
We estimate the grant date fair value of stock options using a Black-Scholes valuation model. The
expected volatility is based on volatilities of a peer group of publicly-traded companies. The risk
free interest rate is based on the United States Treasury yield curve in effect on the date of
grant for the respective expected life of the option. The expected life represents the time the
options granted are expected to be outstanding. We have elected to use the shortcut approach in
accordance with Staff Accounting Bulletin (SAB) No. 107, Share-Based Payment, and SAB No. 110,
Simplified Method for Plain Vanilla Share Options, to develop the expected life. We recognize
compensation cost related to the stock options on a straight-line method over the requisite service
period.
See notes to financial statements, Summary of significant accounting policies Share-based
compensation, for disclosure related to the Companys stock compensation expense and related
valuation model assumptions.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk represents the risk of loss that may impact our financial position due to adverse
changes in financial market prices and rates. Our market risk exposure is primarily the result of
fluctuations in interest rates. We do not hold or issue financial instruments for trading purposes.
Interest rate sensitivity
We are exposed to interest rate risks primarily through borrowings under our credit facility.
Interest on our borrowings is based upon variable rates. We have an interest rate swap agreement in
place with a notional amount of $25.0 million which effectively converts variable rate debt to
fixed rate debt at an interest rate of 5.11%. The interest rate swap reflected in the balance
sheets as of May 2, 2009 and January 31, 2009 had a negative fair value of $0.9 million and $1.0
million, respectively, and is included in accrued liabilities. The interest rate swap is designated
as a cash flow hedge, the effective portion of which is recorded as an unrecognized gain or loss in
accumulated other comprehensive loss in stockholders equity. Our weighted average debt for the
three months ended May 2, 2009 was $77.6 million, adjusted for the $25.0 million hedged amount. A
hypothetical 1% increase or decrease in interest rates would have resulted in a $0.2 million change
to our interest expense for the three months ended May 2, 2009.
20
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures over Financial Reporting
We have established disclosure controls and procedures to ensure that material information relating
to the Company is made known to the officers who certify our financial reports and to the members
of our senior management and board of directors.
Based on managements evaluation as of May 2, 2009, our Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934) are effective to ensure that the
information required to be disclosed by us in our reports that we file or submit under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commissions rules and forms.
Changes in Internal Control over Financial Reporting
There were no changes to our internal controls over financial reporting during the three months
ended May 2, 2009 that have materially affected, or are reasonably likely to materially affect, our
internal controls over financial reporting.
Part II Other Information
Item 1. Legal Proceedings
Securities litigation In December 2007 and January 2008, three putative securities class action
lawsuits were filed against us and certain of our current and then-current executive officers in
the United States District Court for the Northern District of Illinois. Each suit alleges that the
prospectus and registration statement filed pursuant to our initial public offering contained
materially false and misleading statements and failed to disclose material facts. Each suit claims
violations of Sections 11, 12(a)(2) and/or 15 of the Securities Act of 1933, and the two later
filed suits added claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as
well as the associated Rule 10b-5. In February 2008, two of the plaintiffs filed competing motions
to consolidate the actions and appoint lead plaintiffs and lead plaintiffs counsel. On March 18,
2008, after one of the plaintiffs withdrew his motion, the suits were consolidated and plaintiffs
in the Mirsky v. ULTA action were appointed lead plaintiffs. Lead plaintiffs filed their amended
complaint on May 19, 2008. The amended complaint alleges no new violations of the securities laws
not asserted in the prior complaints. It adds no new defendants and drops one of the then-current
officers as a defendant. On July 21, 2008, Defendants filed a motion to dismiss the Amended
Complaint. On September 24, 2008, Lead Plaintiffs filed their opposition to the motion to dismiss,
and on October 24, 2008, Defendants filed their reply memorandum in support of their motion to
dismiss. On March 19, 2009, Defendants motion to dismiss was denied.
On May 29, 2009, we and our primary insurance carrier engaged in a mediation with counsel
representing the putative class. Although we continue to deny plaintiffs allegations, in the
interest of putting this matter behind us, we and our insurer have reached a tentative settlement
with plaintiffs, subject to agreement on comprehensive settlement documentation and approval by the
Court. All amounts to be paid under the tentative settlement will be paid out of proceeds of our
directors and officers liability insurance coverage.
General litigation We are also involved in various legal proceedings that are incidental to the
conduct of our business, including, but not limited to, employment related claims. In the opinion
of management, the amount of any liability with respect to these proceedings, either individually
or in the aggregate, will not be material.
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider the
factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year
ended January 31, 2009, which could materially affect our business, financial condition, financial
results or future performance. There have been no material changes from the risk factors previously
disclosed in our Annual Report on Form 10-K for the year ended January 31, 2009.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
21
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits
|
|
|
Exhibit |
|
|
number |
|
Description of document |
3.1
|
|
Amended and Restated Certificate of Incorporation
(incorporated by reference to Exhibit 3.1 to the Companys
Registration Statement on Form S-1 (file No. 333-144405)
filed with the Securities and Exchange Commission on August
17, 2007). |
|
3.2
|
|
Amended and Restated Bylaws (incorporated by reference to
Exhibit 3.2 to the Companys Registration Statement on Form
S-1 (file No. 333-144405) filed with the Securities and
Exchange Commission on August 17, 2007). |
|
4.1
|
|
Specimen Common Stock Certificate (incorporated by
reference to Exhibit 4.1 to the Companys Registration
Statement on Form S-1 (file No. 333-144405) filed with the
Securities and Exchange Commission on October 11, 2007). |
|
4.2
|
|
Third Amended and Restated Registration Rights Agreement
between Ulta Salon, Cosmetics & Fragrance, Inc. and the
stockholders party thereto (incorporated by reference to
Exhibit 4.2 to the Companys Registration Statement on Form
S-1 (file No. 333-144405) filed with the Securities and
Exchange Commission on August 17, 2007). |
|
4.3
|
|
Stockholder Rights Agreement (incorporated by reference to
Exhibit 4.4 to the Companys Registration Statement on Form
S-1 (file No. 333-144405) filed with the Securities and
Exchange Commission on August 17, 2007). |
|
31.1
|
|
Certification of the Chief Executive Officer pursuant to
Rules 13a-14(a) and 15d-14(a) of the Securities Exchange
Act of 1934, as adopted pursuant to section 302 of the
Sarbanes-Oxley Act of 2002. |
|
31.2
|
|
Certification of the Chief Financial Officer pursuant to
Rules 13a-14(a) and 15d-14(a) of the Securities Exchange
Act of 1934, as adopted pursuant to section 302 of the
Sarbanes-Oxley Act of 2002. |
|
32.1
|
|
Certification of the Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on June 11, 2009 on its behalf by the
undersigned, thereunto duly authorized.
|
|
|
|
|
ULTA SALON, COSMETICS & FRAGRANCE, INC. |
|
|
|
|
|
|
|
By:
|
|
/s/ Lynelle P. Kirby
|
|
|
|
|
Lynelle P. Kirby |
|
|
|
|
President, Chief Executive Officer and Director |
|
|
|
|
|
|
|
By:
|
|
/s/ Gregg R. Bodnar
|
|
|
|
|
Gregg R. Bodnar |
|
|
|
|
Chief Financial Officer |
|
|
22