filings.toolsItem 15. Exhibits and Financial Statement Schedules
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Item 15. Exhibits and Financial Statement Schedules
| (a) | The following documents are filed as a part of this Form 10-K: |
|---|
Report of Independent Registered Public Accounting Fir****m
The Stockholders and the Board of Directors of Ulta Beauty, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Ulta Beauty, Inc. (the Company) as of February 1, 2020, and February 2, 2019, the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended February 1, 2020, and the related notes and financial statement schedule listed in the Index at Item 15 (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at February 1, 2020 and February 2, 2019, and the consolidated results of its operations and its cash flows for each of the three years in the period ended February 1, 2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of February 1, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 27, 2020 expressed an unqualified opinion thereon.
Adoption of New Accounting Standards
As discussed in the Note 2 to the consolidated financial statements, the Company changed its method of accounting for leases in 2019 due to the adoption of ASU No. 2016-02, Leases (Topic 842) using the modified retrospective approach. See below for discussion of our related critical audit matter.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical audit matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
| | Adoption of ASU 2016-02, Leases (Topic 842) |
|---|---|
| Description of the matter | As discussed above and in Notes 2 and 8 to the consolidated financial statements, on February 3, 2019, the Company adopted Accounting Standard Codification ASU 2016-02, Leases (Topic 842), using the modified retrospective approach by recognizing and measuring leases without revising comparative period information or disclosures. The adoption of Topic 842 resulted in the recognition of operating lease assets and liabilities of $1,460,866 thousands and $1,839,970 thousands, respectively, as of February 3, 2019. Auditing the Company’s adoption of Topic 842 was complex because of the estimation involved in calculating the incremental borrowing rate and its impact on the large volume of leases. The Company’s estimate of the incremental borrowing rate was challenging, as the Company does not have publicly traded debt. Therefore, to estimate their incremental borrowing rate, the Company engaged a third-party specialist to develop a synthetic credit rating based on certain profitability metrics, margins, asset turnover ratios, liquidity ratios and solvency ratios compared to other rated issuers in the retail industry. The determination of the incremental borrowing rate was judgmental and had a significant impact on the amounts recognized in the financial statements. |
| How we addressed the matter in our audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Topic 842 adoption process. This included testing controls over determining the completeness of the lease population as well as management's estimate of the incremental borrowing rate. To audit the Company’s adoption of Topic 842, we performed audit procedures that included, among others, performing an evaluation of the completeness of the population of contracts that meet the definition of a lease under Topic 842, testing the accuracy of lease terms within the lease IT system by agreeing the information to the underlying lease contract, and testing the accuracy of the Company’s system calculations of initial lease assets and lease liabilities. We also involved our valuation specialists to assist us in evaluating the methodologies used by management to calculate the incremental borrowing rate for each lease and related significant assumptions, such as credit quality and collateral adjustments, and to calculate a range of incremental borrowing rates based on independently observed data. We evaluated the reasonableness of the incremental borrowing rate for each lease used by the Company by comparing it to the range of rates we calculated. We performed a sensitivity analysis of significant assumptions to evaluate the change in the operating lease asset and liability. In addition, for a sample of leases, we evaluated whether the incremental borrowing rate used in the calculation of the lease liability was appropriately applied at the effective date based on the total lease term measured at lease inception under ASC 840, as elected by the Company under the transition provisions in Topic 842. |
| | Loyalty Program |
|---|---|
| Description of the matter | The Company maintains a loyalty program, Ultamate Rewards, which offers members the ability to earn and redeem points on purchases of products and services. As described in Notes 2 and 4 to the consolidated financial statements, revenue from the loyalty program is recognized when the members redeem points or points expire. The Company estimates the amount of revenue to defer using the standalone selling price of the points earned and the expected redemption percentage. The Company evaluates its estimated standalone selling price quarterly based on the value of products or services purchased using points. The expected redemption percentage is based on historical redemption patterns in conjunction with current information and trends. The Company evaluates the estimated redemption rate based on observed customer behaviors and trends. Auditing the Company’s estimate of loyalty deferred revenue was complex because the calculation involves subjective management assumptions for the standalone selling price and expected redemption rate. In particular, the estimate is sensitive to these significant assumptions, which are affected by expectations about future customer behavior. |
| How we addressed the matter in our audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of the Company’s estimation process and controls supporting the measurement and recognition of the amount of loyalty revenue deferred. This included testing controls over management’s review of the assumptions and other inputs used in the estimation, the completeness and accuracy of issuance and redemption data used in the calculation and controls over the assignment of membership levels based on customer spending patterns. Our audit procedures included, among others, evaluating the methodology used, analyzing the significant assumptions discussed above, and testing the accuracy and completeness of the underlying data used in management’s calculation. To audit the standalone selling price per point, we validated that the price per point for each membership level was appropriate based on products or services purchased by loyalty members. To audit the redemption rate, we tested redemption activity and compared the results of that testing to the redemption rate used by management in its estimate. We also considered recent trends in redemption activity as well as loyalty customer behavior and spending by membership level and the impact on the redemption rate. In addition, we performed sensitivity analyses of significant assumptions to evaluate the change in the deferral amounts. |
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1997.
Chicago, Illinois
March 27, 2020
Report of Independent Registered Public Accounting Firm
The Stockholders’ and the Board of Directors Ulta Beauty, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Ulta Beauty, Inc.’s internal control over financial reporting as of February 1, 2020, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Ulta Beauty, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of February 1, 2020, based on COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of February 1, 2020 and February 2, 2019, the related consolidated statements of income, stockholders’ equity and cash flows for each of the three years in the period ended February 1, 2020, and the related notes and financial statement schedule listed in the Index at Item 15 and our report dated March 27, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s annual report on internal control over financial reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Chicago, Illinois
March 27, 2020
Ulta Beauty, Inc.
Consolidated Balance Sheets
| | | | | | | |
|---|---|---|---|---|---|---|
| | | February 1, | | February 2, | ||
| (In thousands, except per share data) | 2020 | 2019 | ||||
| Assets | | | | | | |
| Current assets: | | | | | | |
| Cash and cash equivalents | | $ | 392,325 | | $ | 409,251 |
| Short-term investments | | | 110,000 | | | — |
| Receivables, net | | | 139,337 | | | 136,168 |
| Merchandise inventories, net | | | 1,293,701 | | | 1,214,329 |
| Prepaid expenses and other current assets | | | 103,567 | | | 138,116 |
| Prepaid income taxes | | | 16,387 | | | 16,997 |
| Total current assets | | | 2,055,317 | | | 1,914,861 |
| | | | | | | |
| Property and equipment, net | | | 1,205,524 | | | 1,226,029 |
| Operating lease assets | | | 1,537,565 | | | — |
| Goodwill | | | 10,870 | | | 10,870 |
| Other intangible assets, net | | | 3,391 | | | 4,317 |
| Deferred compensation plan assets | | | 27,849 | | | 20,511 |
| Other long-term assets | | | 23,356 | | | 14,584 |
| Total assets | | $ | 4,863,872 | | $ | 3,191,172 |
| | | | | | | |
| Liabilities and stockholders’ equity | | | | | | |
| Current liabilities: | | | | | | |
| Accounts payable | | $ | 414,009 | | $ | 404,016 |
| Accrued liabilities | | | 246,088 | | | 220,666 |
| Deferred revenue | | | 237,535 | | | 199,054 |
| Current operating lease liabilities | | | 239,629 | | | — |
| Total current liabilities | | | 1,137,261 | | | 823,736 |
| | | | | | | |
| Non-current operating lease liabilities | | | 1,698,718 | | | — |
| Deferred rent | | | — | | | 434,980 |
| Deferred income taxes | | | 89,367 | | | 83,864 |
| Other long-term liabilities | | | 36,432 | | | 28,374 |
| Total liabilities | | | 2,961,778 | | | 1,370,954 |
| | | | | | | |
| Commitments and contingencies (Note 9) | | | | | | |
| | | | | | | |
| Stockholders' equity: | | | | | | |
| Common stock, $0.01 par value, 400,000 shares authorized; 57,285 and 59,232 shares issued; 56,609 and 58,584 shares outstanding; at February 1, 2020 and February 2, 2019, respectively | | | 573 | | | 592 |
| Treasury stock-common, at cost | | | (34,448) | | | (24,908) |
| Additional paid-in capital | | | 807,492 | | | 738,671 |
| Retained earnings | | | 1,128,477 | | | 1,105,863 |
| Total stockholders’ equity | | | 1,902,094 | | | 1,820,218 |
| Total liabilities and stockholders’ equity | | $ | 4,863,872 | | $ | 3,191,172 |
See accompanying notes to consolidated financial statements.
Ulta Beauty, Inc.
Consolidated Statements of Income
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| | | Fiscal year ended | |||||||
| | | February 1, | | February 2, | | February 3, | |||
| (In thousands, except per share data) | | 2020 | 2019 | 2018 | |||||
| Net sales | | $ | 7,398,068 | $ | 6,716,615 | $ | 5,884,506 | ||
| Cost of sales | | | 4,717,004 | | | 4,307,304 | | | 3,787,697 |
| Gross profit | | | 2,681,064 | | | 2,409,311 | | | 2,096,809 |
| | | | | | | | | | |
| Selling, general and administrative expenses | | | 1,760,716 | | | 1,535,464 | | | 1,287,232 |
| Pre-opening expenses | | | 19,254 | | | 19,767 | | | 24,286 |
| Operating income | | | 901,094 | | | 854,080 | | | 785,291 |
| Interest income, net | | | (5,056) | | | (5,061) | | | (1,568) |
| Income before income taxes | | | 906,150 | | | 859,141 | | | 786,859 |
| Income tax expense | | | 200,205 | | | 200,582 | | | 231,625 |
| Net income | | $ | 705,945 | | $ | 658,559 | | $ | 555,234 |
| | | | | | | | | | |
| Net income per common share: | | | | | | | | | |
| Basic | | $ | 12.21 | | $ | 11.00 | | $ | 9.02 |
| Diluted | | $ | 12.15 | | $ | 10.94 | | $ | 8.96 |
| | | | | | | | | | |
| Weighted average common shares outstanding: | | | | | | | | | |
| Basic | | | 57,840 | | | 59,864 | | | 61,556 |
| Diluted | | | 58,105 | | | 60,181 | | | 61,975 |
See accompanying notes to consolidated financial statements.
Ulta Beauty, Inc.
Consolidated Statements of Cash Flows
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| | | Fiscal year ended | |||||||
| | | February 1, | | February 2, | | February 3, | |||
| (In thousands) | | 2020 | 2019 | 2018 | |||||
| Operating activities | | | | | | | | | |
| Net income | | $ | 705,945 | | $ | 658,559 | | $ | 555,234 |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | |
| Depreciation and amortization | | | 295,599 | | | 279,472 | | | 252,713 |
| Non-cash lease expense | | | 278,820 | | | — | | | — |
| Deferred income taxes | | | 5,503 | | | 34,080 | | | (27,095) |
| Stock-based compensation expense | | | 25,045 | | | 26,636 | | | 24,399 |
| Loss on disposal of property and equipment | | | 5,850 | | | 2,885 | | | 7,518 |
| Change in operating assets and liabilities: | | | | | | | | | |
| Receivables | | | (20,637) | | | (36,387) | | | (11,088) |
| Merchandise inventories | | | (79,372) | | | (122,019) | | | (152,449) |
| Prepaid expenses and other current assets | | | 9,289 | | | (39,450) | | | (10,045) |
| Income taxes | | | 610 | | | (29,609) | | | 3,641 |
| Accounts payable | | | 9,993 | | | 78,256 | | | 66,240 |
| Accrued liabilities | | | 28,183 | | | 29,265 | | | (30,695) |
| Deferred revenue | | | 38,481 | | | 50,684 | | | 67,586 |
| Operating lease liabilities | | | (256,910) | | | — | | | — |
| Deferred rent | | | — | | | 27,064 | | | 41,725 |
| Other assets and liabilities | | | 54,894 | | | (3,309) | | | (8,318) |
| Net cash provided by operating activities | | | 1,101,293 | | | 956,127 | | | 779,366 |
| | | | | | | | | | |
| Investing activities | | | | | | | | | |
| Purchases of short-term investments | | | (110,000) | | | (386,193) | | | (330,000) |
| Proceeds from short-term investments | | | — | | | 506,193 | | | 240,000 |
| Capital expenditures | | | (298,534) | | | (319,400) | | | (440,714) |
| Acquisitions, net of cash acquired | | | — | | | (13,606) | | | — |
| Purchases of equity investments | | | (62,946) | | | (2,101) | | | — |
| Net cash used in investing activities | | | (471,480) | | | (215,107) | | | (530,714) |
| | | | | | | | | | |
| Financing activities | | | | | | | | | |
| Repurchase of common shares | | | (680,979) | | | (616,194) | | | (367,581) |
| Stock options exercised | | | 43,780 | | | 13,121 | | | 16,190 |
| Purchase of treasury shares | | | (9,540) | | | (6,141) | | | (4,243) |
| Debt issuance costs | | | — | | | — | | | (583) |
| Net cash used in financing activities | | | (646,739) | | | (609,214) | | | (356,217) |
| | | | | | | | | | |
| Net increase (decrease) in cash and cash equivalents | | | (16,926) | | | 131,806 | | | (107,565) |
| Cash and cash equivalents at beginning of year | | | 409,251 | | | 277,445 | | | 385,010 |
| Cash and cash equivalents at end of year | | $ | 392,325 | | $ | 409,251 | | $ | 277,445 |
| | | | | | | | | | |
| Supplemental information | | | | | | | | | |
| Income taxes paid, net of refunds | | $ | 133,861 | | $ | 195,869 | $ | 254,619 | |
| Non-cash capital expenditures | | | 26,901 | | | 28,746 | | | 43,471 |
See accompanying notes to consolidated financial statements.
Ulta Beauty, Inc.
Consolidated Statements of Stockholders’ Equity
| | | | | | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | | Treasury - | | | | | | | | ||||||||
| | | Common Stock | | Common Stock | | Additional | | | | Total | |||||||||
| | | Issued | | | | Treasury | | | | Paid-In | | Retained | | Stockholders' | |||||
| (In thousands) | Shares | Amount | Shares | Amount | Capital | Earnings | | Equity | |||||||||||
| Balance – January 28, 2017 | | 62,733 | | $ | 627 | | (604) | | $ | (14,524) | | $ | 658,330 | | $ | 905,785 | | $ | 1,550,218 |
| Net income | | — | | | — | | — | | | — | | | — | | | 555,234 | | | 555,234 |
| Stock-based compensation | | — | | | — | | — | | | — | | | 24,399 | | | — | | | 24,399 |
| Stock options exercised and other awards | | 212 | | | 2 | | — | | | — | | | 16,188 | | | — | | | 16,190 |
| Purchase of treasury shares | | — | | | — | | (15) | | | (4,243) | | | — | | | — | | | (4,243) |
| Repurchase of common shares | | (1,504) | | | (15) | | — | | | — | | | — | | | (367,566) | | | (367,581) |
| Balance – February 3, 2018 | | 61,441 | | $ | 614 | | (619) | | $ | (18,767) | | $ | 698,917 | | $ | 1,093,453 | | $ | 1,774,217 |
| Net income | | — | | | — | | — | | | — | | | — | | | 658,559 | | | 658,559 |
| Stock-based compensation | | — | | | — | | — | | | — | | | 26,636 | | | — | | | 26,636 |
| Adoption of accounting standards - ASC 606 | | — | | | — | | — | | | — | | | — | | | (29,980) | | | (29,980) |
| Stock options exercised and other awards | | 255 | | | 3 | | — | | | — | | | 13,118 | | | — | | | 13,121 |
| Purchase of treasury shares | | — | | | — | | (29) | | | (6,141) | | | — | | | — | | | (6,141) |
| Repurchase of common shares | | (2,464) | | | (25) | | — | | | — | | | — | | | (616,169) | | | (616,194) |
| Balance – February 2, 2019 | | 59,232 | | $ | 592 | | (648) | | $ | (24,908) | | $ | 738,671 | | $ | 1,105,863 | | $ | 1,820,218 |
| Net income | | — | | | — | | — | | | — | | | — | | | 705,945 | | | 705,945 |
| Stock-based compensation | | — | | | — | | — | | | — | | | 25,045 | | | — | | | 25,045 |
| Adoption of accounting standards - ASC 842 | | — | | | — | | — | | | — | | | — | | | (2,375) | | | (2,375) |
| Stock options exercised and other awards | | 374 | | | 4 | | — | | | — | | | 43,776 | | | — | | | 43,780 |
| Purchase of treasury shares | | — | | | — | | (28) | | | (9,540) | | | — | | | — | | | (9,540) |
| Repurchase of common shares | | (2,321) | | | (23) | | — | | | — | | | — | | | (680,956) | | | (680,979) |
| Balance – February 1, 2020 | | 57,285 | | $ | 573 | | (676) | | $ | (34,448) | | $ | 807,492 | | $ | 1,128,477 | | $ | 1,902,094 |
See accompanying notes to consolidated financial statements.
**Ulta Beauty, Inc.**Notes to Consolidated Financial Statements (In thousands, except per share and store count data)
1. Business and basis of presentation
On January 29, 2017, Ulta Salon, Cosmetics & Fragrance, Inc. implemented a holding company reorganization. Pursuant to the reorganization, Ulta Beauty, Inc., which was incorporated as a Delaware corporation in December 2016, became the successor to Ulta Salon, Cosmetics & Fragrance, Inc., the former publicly-traded company and now a wholly owned subsidiary of Ulta Beauty. As used in these notes and throughout this Annual Report on Form 10-K, all references to “we,” “us,” “our,” “Ulta Beauty,” or the “Company” refer to Ulta Beauty, Inc. and its consolidated subsidiaries.
The Company was originally founded in 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 February 1, 2020, the Company operated 1,254 stores across 50 states. All amounts are stated in thousands, with the exception of per share amounts and number of stores.
The Company has one reportable segment, which includes retail stores, salon services, and e-commerce.
2. Summary of significant accounting policies
Fiscal year
The Company’s fiscal year is the 52 or 53 weeks ending on the Saturday closest to January 31. The Company’s fiscal years ended February 1, 2020 (fiscal 2019), February 2, 2019 (fiscal 2018), and February 3, 2018 (fiscal 2017) were 52, 52, and 53-week years, respectively.
Consolidation
The Company’s consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts, transactions, and unrealized profit were eliminated in consolidation.
Use of estimates
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the accounting period. Actual results could differ from those estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
Cash and cash equivalents
Cash and cash equivalents include cash on hand and highly liquid investments with original maturities of three months or less from the date of purchase. Cash equivalents also include amounts due from third-party financial institutions for credit card and debit card transactions. These receivables typically settle in five days or less with little or no default risk.
| | | | | | | |
|---|---|---|---|---|---|---|
| | | February 1, | | February 2, | ||
| (In thousands) | | 2020 | 2019 | |||
| Cash | | $ | 212,876 | | $ | 351,553 |
| Short-term investments | | | 110,000 | | | — |
| Receivables from third-party financial institutions for credit card and debit card transactions | | | 69,449 | | | 57,698 |
| Cash and cash equivalents | | $ | 392,325 | | $ | 409,251 |
Short-term investments
The Company determines the balance sheet classification of its investments at the time of purchase and evaluates the classification at each balance sheet date. Money market funds, certificates of deposit, and time deposits with maturities of greater than three months but no more than twelve months are carried at cost, which approximates fair value and are recorded in the consolidated balance sheets in short-term investments (see Note 14, “Investments”).
Receivables
Currently, receivables consist principally of amounts due from vendors. In previous years, receivables also included tenant improvement allowances earned but not yet received. These receivables are computed based on provisions of the vendor and lease agreements in place and the Company’s completed performance. The Company does not require collateral on its receivables and does not accrue interest. Credit risk with respect to receivables is limited due to the diversity of vendors and landlords comprising the Company’s vendor base. The Company performs ongoing credit evaluations of its vendors and evaluates the collectability of its receivables based on the length of time the receivable is past due and historical experience.
The receivable for vendor allowances was $113,048 and $97,885 as of February 1, 2020 and February 2, 2019, respectively. The receivable for landlord allowances was $19,746 as of February 2, 2019. Prior to fiscal 2019, all tenant improvement allowances were included in the receivable for landlord allowances. Subsequent to the adoption of Accounting Standards Update (ASU) 2016-02, Leases (Topic 842), a portion of landlord allowances is recorded in the right-of-use asset. The allowance for doubtful receivables was $1,363 and $651 as of February 1, 2020 and February 2, 2019, respectively.
Merchandise inventories
Merchandise inventories are stated at the lower of cost or market (net realizable value). Cost is determined using the moving average cost method and includes costs incurred to purchase and distribute goods. Inventory cost also includes vendor allowances related to co-op advertising, markdowns, and volume discounts. The Company maintains an inventory reserve for lower of cost or market (net realizable value) and shrink. The inventory reserve was $46,941 and $36,640 as of February 1, 2020 and February 2, 2019, respectively.
Fair value of financial instruments
The carrying value of cash and cash equivalents, short-term investments, accounts receivable, and accounts payable approximates their estimated fair values due to the short maturities of these instruments. The Company had no outstanding debt as of February 1, 2020 and February 2, 2019.
Property and equipment
The Company’s property and equipment are stated at cost, net of accumulated depreciation and amortization. Maintenance and repairs are charged to operating expense as incurred. The Company’s assets are depreciated or amortized using the straight-line method over the shorter of their estimated useful lives or the expected lease term as follows:
| | |
|---|---|
| Equipment and fixtures | 1 to 10 years |
| Leasehold improvements | 10 years |
| Electronic equipment and software | 3 to 5 years |
The Company capitalizes costs incurred during the application development stage in developing or purchasing internal use software. These costs are amortized over the estimated useful life of the software.
The Company periodically evaluates whether changes have occurred that would require revision of the remaining useful life of equipment and leasehold improvements or render them not recoverable. If such circumstances arise, the Company estimates the undiscounted future operating cash flows based on the remaining useful life of the asset to determine whether the long-lived assets are impaired. If the undiscounted cash flows are less than the carrying amount of the assets, the resulting impairment charges to be recorded are calculated based on the excess of the carrying value of the assets over the fair value of such assets. No significant impairment charges were recognized in fiscal 2019, fiscal 2018, or fiscal 2017. Impairment charges are included in selling, general and administrative (SG&A) expenses in the consolidated statements of income.
Goodwill
Goodwill represents the excess of cost over the fair value of net assets acquired. The Company reviews the recoverability of goodwill annually during the fourth quarter or more frequently if an event occurs or circumstances change that would indicate that impairment may exist (see Note 6, “Goodwill”).
Other intangible assets
Other definite-lived intangible assets are amortized over their useful lives. The Company reviews the recoverability of long-lived assets whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable (see Note 7, “Other intangible assets”).
Leases
The Company determines whether an arrangement is or contains a lease at contract inception. The lease classification evaluation begins at the lease commencement date. The lease term used in the evaluation includes the non-cancellable period for which the Company has the right to use the underlying asset, together with renewal option periods when the exercise of the renewal option is reasonably certain.
Total rent payable is recorded during the lease term, including rent escalations in which the amount of future rent is fixed on the straight-line basis over the term of the lease (including the rent holiday period beginning upon control of the premises and any fixed payments stated in the lease). For leases with an initial term greater than 12 months, a related lease liability is recorded on the balance sheet at the present value of future payments discounted at the estimated fully collateralized incremental borrowing rate (discount rate) corresponding with the lease term. In addition, a right-of-use asset is recorded as the initial amount of the lease liability, plus any lease payments made to the lessor before or at the lease commencement date and any initial direct costs incurred, less any tenant improvement allowance incentives received. Tenant incentives are amortized through the right-of-use asset as reduction of rent expense over the lease term. The difference between the minimum rents paid and the straight-line rent is reflected within the associated right-of-use asset. Prior to fiscal 2019, this difference was recorded as deferred rent on the consolidated balance sheets. Operating lease expense is recognized on a straight-line basis over the lease term.
Certain leases contain provisions that require variable payments based upon sales volume or payment of common area maintenance costs (variable lease cost). Variable lease costs are expensed as incurred. This results in some variability in lease expense as a percentage of revenues over the term of the lease in stores where variable lease costs are paid. Contingent rent is accrued each period as the liabilities are incurred, in addition to the straight-line rent expense. This results in some variability in lease expense as a percentage of revenues over the term of the lease in stores where contingent rent is paid.
Leases with an initial term of 12 months or less (short-term leases) are not recorded on the balance sheet. Short-term lease expense is recognized on a straight-line basis over the lease term.
The Company subleases certain real estate to third parties for stores with excess square footage space.
The Company does not separate lease and non-lease components (e.g., common area maintenance).
As the interest rate implicit in the lease is not readily determinable, the Company uses its incremental borrowing rate corresponding with the lease term. As there are no outstanding borrowings under the Company’s credit facility, this rate is estimated based on prevailing market conditions, comparable company and credit analysis, and judgment. The incremental borrowing rate is reassessed if there is a change to the lease term or if a modification occurs and it is not accounted for as a separate contract.
Loyalty program
The Company maintains a loyalty program, Ultamate Rewards, which allows members to earn points based on purchases of merchandise or services. Points earned are valid for at least one year. The loyalty program represents a material right to the customer and points may be redeemed on future products and services. Revenue from the loyalty program is recognized when the members redeem points or points expire. The Company defers revenue related to points earned that have not yet been redeemed. The amount of deferred revenue includes estimates for the standalone selling price of points earned by members and the percentage of points expected to be redeemed. The expected redemption percentage is based on historical redemption patterns and considers current information or trends.
When a guest redeems points or the points expire, the Company recognizes revenue in net sales on the consolidated statements of income.
Prior to fiscal 2018, loyalty program revenue was recorded using the incremental cost method within cost of sales on the consolidated statements of income.
Credit cards
The Company has agreements (the Agreements) with third parties to provide guests with private label credit cards and/or co-branded credit cards (collectively, the Credit Cards). The private label credit card can be used at any store location and online, and the co-branded credit card can be used anywhere the co-branded card is accepted. A third-party financing company is the sole owner of the accounts and underwrites the credit issued under the Credit Card programs. The Company’s performance obligation is to maintain the Ultamate Rewards loyalty program as only guests enrolled in the loyalty program can apply for the Credit Cards. Loyalty members earn points through purchases at Ulta Beauty and anywhere the co-branded credit card is accepted.
The third parties reimburse the Company for certain credit card program costs such as advertising and loyalty points, which help promote the credit card program. The Company recognizes revenue when collectability is reasonably assured, under the assumption the amounts are not constrained and it is probable that a significant revenue reversal will not occur in future periods, which is generally the time at which the actual usage of the Credit Cards or specified transaction occurs.
The Company accounts for the amounts associated with the Agreements as a single contract with the sole commercial objective to maintain the Credit Card programs. As a result, all amounts associated with the Agreements are recognized within net sales on the consolidated statements of income.
Gift card program
The Company records a contract liability for gift card sales which will be redeemed in the future within deferred revenue on the consolidated balance sheets and recognized in net sales when the gift card is redeemed for product or services. The Company’s gift cards do not expire and do not include service fees that decrease guest balances. The Company has maintained historical data related to gift card transactions sold and redeemed over a significant time frame. The Company recognizes gift card breakage (amounts not expected to be redeemed) to the extent there is no requirement for remitting balances to governmental agencies under unclaimed property laws. Estimated gift card breakage revenue is recognized over time in proportion to actual gift card redemptions. Gift card breakage revenue was $12,448, $12,446, and $7,783 in fiscal 2019, 2018, and 2017, respectively.
Revenue recognition
Revenue is recognized when control of the promised goods or services is transferred to the guest, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services.
The Company determines revenue recognition through the following steps:
| ● | Identification of the contract, or contracts, with a guest; |
|---|
| ● | Identification of the performance obligations in the contract; |
|---|
| ● | Determination of the transaction price; |
|---|
| ● | Allocation of the transaction price to the performance obligations in the contract; and |
|---|
| ● | Recognition of revenue when, or as, a performance obligation is satisfied. |
|---|
The Company’s net sales include retail stores and e-commerce merchandise sales as well as salon services and other revenue.
Revenue from merchandise sales at retail stores is recognized at the point of sale, net of estimated returns. Revenue from e-commerce merchandise sales is recognized upon shipment of the merchandise to the guest based on meeting the transfer of control criteria, net of estimated returns. Salon services revenue is recognized at the time the service is provided to the guest. Shipping and handling are treated as costs to fulfill the contract and not a separate performance obligation. Accordingly, the Company recognizes revenue for its single performance obligation related to online sales at the time control of the merchandise passes to the customer, which is at the time of shipment. The Company provides refunds for merchandise returns within 60 days from the original purchase date. State sales taxes are presented on a net basis as the Company considers itself a pass-through conduit for collecting and remitting state sales tax. Company coupons and other incentives are recorded as a reduction of net sales.
Vendor allowances
The Company receives allowances from vendors in the normal course of business including advertising and markdown allowances, purchase volume discounts and rebates, reimbursement for defective merchandise, and certain selling and display expenses. Substantially all vendor allowances are recorded as a reduction of the vendor’s product cost and are recognized in cost of sales as the product is sold.
Advertising
Advertising expense consists principally of print, digital and social media, and television and radio advertising. The Company expenses the costs related to its advertising in the period the related promotional event occurs. Prepaid advertising costs included in prepaid expenses and other current assets on the consolidated balance sheets were $9,605
and $9,384 as of February 1, 2020 and February 2, 2019, respectively. Total advertising costs, exclusive of incentives from vendors and start-up advertising expense, are presented in the following table:
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| | | February 1, | | February 2, | | February 3, | |||
| (In thousands) | | 2020 | | 2019 | 2018 | ||||
| Advertising costs | | $ | 317,865 | | $ | 294,489 | | $ | 259,423 |
| Advertising expense as a percentage of sales | | | 4.3% | | | 4.4% | | | 4.4% |
Pre-opening expenses
Non-capital expenditures incurred prior to the grand opening of a new, remodeled, or relocated store are expensed as incurred.
Cost of sales
Cost of sales includes the cost of merchandise sold, including substantially all vendor allowances, which are treated as a reduction of merchandise costs; distribution costs including labor and related benefits, freight, rent, depreciation and amortization, real estate taxes, utilities, and insurance; shipping and handling costs; retail stores occupancy costs including rent, depreciation and amortization, real estate taxes, utilities, repairs and maintenance, insurance, licenses, and cleaning expenses; salon services payroll and benefits; and shrink and inventory valuation reserves.
Selling, general and administrative expenses
SG&A expenses includes payroll, bonus, and benefit costs for retail and corporate employees; advertising and marketing costs; occupancy costs related to our corporate office facilities; stock-based compensation expense; depreciation and amortization for all assets, except those related to our retail store and distribution operations, which are included in cost of sales; and legal, finance, information systems, and other corporate overhead costs.
Income taxes
Deferred income taxes reflect the net tax effect of temporary differences between the financial statement carrying amounts of assets and liabilities and their tax bases. The amounts reported were derived using the enacted tax rates in effect for the year the differences are expected to reverse.
Income tax benefits related to uncertain tax positions are recognized only when it is more likely than not that the tax position will be sustained on examination by the taxing authorities. The determination is based on the technical merits of the position and presumes that each uncertain tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information. Penalties and interest related to unrecognized tax positions are recorded in income tax expense in the consolidated statements of income.
Share-based compensation
Share-based compensation cost is measured at grant date, based on the fair value of the award, and is recognized on a straight-line basis over the requisite service period for awards expected to vest. The Company recorded stock compensation expense of $25,642, $27,489, and $24,399 in fiscal 2019, 2018 and 2017, respectively (see Note 15, “Share-based awards”).
Insurance expense
The Company has insurance programs with third party insurers for employee health, workers compensation, and general liability, among others, to limit the Company’s liability exposure. The insurance programs are premium based and include retentions, deductibles, and stop loss coverage. Current stop loss coverage per claim is $350 for employee health claims, $100 for general liability claims, and $250 for workers compensation claims. The Company makes collateral and premium payments during the plan year and accrues expenses in the event additional premium is due from the Company
based on actual claim results. In fiscal 2018, the Company created UB Insurance, Inc., an Arizona-based wholly owned captive insurance subsidiary of the Company, which charges the operating subsidiaries of the Company premiums to insure certain liability exposures. Pursuant to Arizona insurance regulations, UB Insurance, Inc. maintains certain levels of cash and cash equivalents related to its liability exposures.
Net income per common share
Basic net income per common share is computed by dividing income available to common stockholders by the weighted-average number of shares of common stock outstanding during the period. Diluted net income per common share includes dilutive common stock equivalents, using the treasury stock method (see Note 16, “Net income per common share”).
Recent accounting pronouncements not yet adopted
Intangibles – Goodwill and Other-Internal-Use Software
In August 2018, the Financial Accounting Standards Board (FASB) issued ASU 2018-15, Intangibles – Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customers Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract, which clarifies and aligns the accounting for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This guidance is effective for interim and annual reporting periods beginning after December 15, 2019 and should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. Early adoption is permitted. The adoption of ASU 2018-15 is not expected to have a material impact on the Company’s consolidated financial position, results of operations, or cash flows.
Recently adopted accounting pronouncements
Leases
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The guidance in ASU 2016-02 and subsequently issued amendments requires lessees to capitalize virtually all leases with terms of more than twelve months on the balance sheet as a right-of-use asset and recognize an associated lease liability. The right-of-use asset represents the lessee’s right to use, or control the use of, a specified asset for the specified lease term. The lease liability represents the lessee’s obligation to make lease payments arising from the lease, measured on a discounted basis. Based on certain characteristics, leases are classified as financing or operating leases and their classification impacts the recognition of expense in the income statement. Entities are allowed to apply the modified retrospective approach (1) retrospectively to each comparative period presented or (2) retrospectively at the beginning of the period of adoption through a cumulative-effect adjustment.
The Company adopted the new standard on February 3, 2019 using the modified retrospective approach by recognizing and measuring leases without revising comparative period information or disclosures. The Company elected the transition package of three practical expedients permitted within the standard, which among other things, allows for the carryforward of historical lease classifications. In addition, the Company elected to apply the practical expedient that allows for the combination of lease and non-lease components for all asset classes. The Company made an accounting policy election to keep leases with terms of twelve months or less off the balance sheet and recognize those lease payments on a straight-line basis over the lease term.
The adoption of ASU 2016-02 resulted in the recording of operating lease assets and liabilities of $1,460,866 and $1,839,970 within the consolidated balance sheet, respectively, as of February 3, 2019. As part of the adoption, the Company recorded an adjustment to retained earnings of $2,375. The standard did not materially impact the Company’s consolidated results of operations and had no impact on cash flows. See Note 8, “Leases,” for further details.
The impact to the Company’s opening consolidated balance sheet as of February 3, 2019 was as follows:
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| | | As Reported | | Effect of Adopting | | Balance at | |||
| (In thousands) | February 2, 2019 | ASC 842 | February 3, 2019 | ||||||
| Assets | | | | | | | (Unaudited) | ||
| Receivables, net | | $ | 136,168 | | $ | (17,468) | | $ | 118,700 |
| Prepaid expenses and other current assets | | | 138,116 | | | (25,260) | | | 112,856 |
| Property and equipment, net | | | 1,226,029 | | | (16,983) | | | 1,209,046 |
| Operating lease assets | | | — | | | 1,460,866 | | | 1,460,866 |
| Liabilities and stockholders’ equity | | | | | | | | | |
| Accrued liabilities | | | 220,666 | | | (1,460) | | | 219,206 |
| Current operating lease liabilities | | | — | | | 210,721 | | | 210,721 |
| Deferred rent | | | 434,980 | | | (434,980) | | | — |
| Non-current operating lease liabilities | | | — | | | 1,629,249 | | | 1,629,249 |
| Retained earnings | | | 1,105,863 | | | (2,375) | | | 1,103,488 |
3. Acquisitions
The Company continues to make investments to evolve the customer experience, with a strong emphasis on integrating technology across the business. To support these efforts, the Company paid $13,606 to acquire two technology companies in fiscal 2018.
On September 10, 2018, the Company acquired QM Scientific, an artificial intelligence technology company. The acquisition is not material to the Company’s consolidated financial statements.
On October 29, 2018, the Company acquired GlamST, an augmented reality technology company. The acquisition is not material to the Company’s consolidated financial statements.
4. Revenue
The Company’s net sales include retail stores and e-commerce merchandise sales as well as salon services and other revenue. Other revenue sources include the private label and co-branded credit card programs, as well as deferred revenue related to the loyalty program and gift card breakage.
Disaggregated revenue
The following table sets forth the approximate percentage of net sales by primary category:
| | | | | | | |
|---|---|---|---|---|---|---|
| | | Fiscal year ended | ||||
| | February 1, | February 2, | February 3, | |||
| | | 2020 | | 2019 | | 2018 |
| Cosmetics | | 50% | | 51% | | 51% |
| Skincare, bath, and fragrance | | 22% | | 21% | | 21% |
| Haircare products and styling tools | | 19% | | 19% | | 19% |
| Services | | 5% | | 5% | | 6% |
| Other (nail products, accessories, and other) | | 4% | | 4% | | 3% |
| | | 100% | | 100% | | 100% |
Deferred revenue
Deferred revenue primarily represents contract liabilities for the Company’s obligation to transfer additional goods or services to a guest for which the Company has received consideration, such as unredeemed Ultamate Rewards loyalty points and unredeemed Ulta Beauty gift cards. In addition, the Company recognizes breakage on gift cards proportionately as redemption occurs.
The following table provides a summary of the changes included in deferred revenue during fiscal years 2019 and 2018:
| | | | | | | |
|---|---|---|---|---|---|---|
| | | Fiscal year ended | ||||
| | | February 1, | | February 2, | ||
| | | 2020 | | 2019 | ||
| Beginning balance | | $ | 193,585 | | $ | 110,103 |
| Adoption of ASC 606 | | | — | | | 38,773 |
| Additions to contract liabilities (1) | | | 206,701 | | | 140,638 |
| Deductions to contract liabilities (2) | | | (170,275) | | | (95,929) |
| Ending balance | | $ | 230,011 | | $ | 193,585 |
| (1) | Loyalty points and gift cards issued in the current period but not redeemed or expired. |
|---|
Revenue recognized in the current period related to the beginning liability.
5. Property and equipment
Property and equipment consists of the following:
| | | | | | | |
|---|---|---|---|---|---|---|
| | | February 1, | | February 2, | ||
| (In thousands) | 2020 | 2019 | ||||
| Equipment and fixtures | | $ | 1,073,764 | | $ | 994,668 |
| Leasehold improvements | | 803,398 | | 785,276 | ||
| Electronic equipment and software | | 596,323 | | 544,618 | ||
| Construction-in-progress | | 92,355 | | 50,574 | ||
| | | 2,565,840 | | 2,375,136 | ||
| Less: accumulated depreciation and amortization | | (1,360,316) | | (1,149,107) | ||
| Property and equipment, net | | $ | 1,205,524 | | $ | 1,226,029 |
6. Goodwill
The changes in the carrying amounts of goodwill during the fiscal years 2019 and 2018 are as follows:
| | | | | | | |
|---|---|---|---|---|---|---|
| | | February 1, | | February 2, | ||
| (In thousands) | | 2020 | 2019 | |||
| Balance at beginning of the period | | $ | 10,870 | | $ | — |
| Acquisitions | | | — | | | 10,870 |
| Balance at the end of the period | | $ | 10,870 | | $ | 10,870 |
7. Other intangible assets
Other intangible assets subject to amortization consists of the following:
| | | | | | | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | | February 1, 2020 | | February 2, 2019 | ||||||||||||||
| | | Weighted-average | | Gross | | | | | | Gross | | | | | ||||||
| | | remaining useful | | carrying | | Accumulated | | | | carrying | | Accumulated | | | ||||||
| (In thousands) | life in years | value | amortization | Net | value | amortization | Net | |||||||||||||
| Developed technology | | 3.7 | | $ | 4,631 | | $ | (1,240) | | $ | 3,391 | | $ | 4,631 | | $ | (314) | | $ | 4,317 |
Amortization expense related to intangible assets was $926, $314, and $0 in fiscal 2019, fiscal 2018, and fiscal 2017, respectively.
Estimated amortization expense related to intangible assets at February 1, 2020, for the next five years and thereafter is as follows:
| | | | | | |
|---|---|---|---|---|---|
| | | | | Estimated | |
| | | | | amortization | |
| | | | | expense | |
| Fiscal year | | (In thousands) | |||
| 2020 | | | | $ | 926 |
| 2021 | | | | | 926 |
| 2022 | | | | | 926 |
| 2023 | | | | | 613 |
| 2024 | | | | | — |
| 2025 and thereafter | | | | | — |
| | | | | $ | 3,391 |
8. Leases
The Company leases retail stores, distribution and fast fulfillment centers, corporate offices, and certain equipment under non-cancelable operating leases with various expiration dates through 2032. Leases generally have initial lease terms of 10 years and include renewal options under substantially the same terms and conditions as the original leases. Leases do not contain any material residual value guarantees or material restrictive covenants.
All retail store, distribution and fast fulfillment center, and corporate office leases are classified as operating leases. The Company does not have any finance leases.
The following table presents supplemental balance sheet information, the weighted-average remaining lease term, and discount rate for operating leases as of February 1, 2020:
| | | | | | |
|---|---|---|---|---|---|
| | | | | | |
| (In thousands) | | Classification on the Balance Sheet | February 1, 2020 | ||
| Right-of-use assets | | Operating lease assets | | $ | 1,537,565 |
| | | | | | |
| Current lease liabilities | | Current operating lease liabilities | | $ | 239,629 |
| Non-current lease liabilities | | Non-current operating lease liabilities | | | 1,698,718 |
| Total lease liabilities | | | | $ | 1,938,347 |
| | | | | | |
| Weighted-average remaining lease term | | | | 7.3 years | |
| Weighted-average discount rate | | | | | 4.1% |
Lease cost
The following table presents the components of lease cost for operating leases:
| | | | | | |
|---|---|---|---|---|---|
| | | | | Fiscal Year Ended | |
| (In thousands) | Classification on the Statement of Income | February 1, 2020 | |||
| Operating lease cost | | Cost of sales (1) | | $ | 289,007 |
| Variable lease cost | | Cost of sales | | | 29,054 |
| Short-term lease cost | | Selling, general and administrative expenses | | | 352 |
| Sublease income | | Net sales | | | (691) |
| Total lease cost | | | | $ | 317,722 |
| (1) | The majority of operating lease cost relates to retail stores and distribution and fast fulfillment centers and is classified within cost of sales. Operating lease cost for corporate offices is classified within the selling, general and administrative expenses. Operating lease cost from the control date through store opening date is classified within pre-opening expenses. |
|---|
Other information
The following table presents supplemental disclosures of cash flow information related to operating leases:
| | | | | | |
|---|---|---|---|---|---|
| | | | Fiscal Year Ended | ||
| (In thousands) | | | February 1, 2020 | ||
| Cash paid for operating lease liabilities (1) | | | | $ | 338,942 |
| Operating lease assets obtained in exchange for operating lease liabilities (non-cash) | | | | | 355,286 |
| (1) | Excludes $71,294 related to cash received for tenant incentives. |
|---|
Maturity of lease liabilities
The following table presents maturities of operating lease liabilities as of February 1, 2020:
| | | | | | |
|---|---|---|---|---|---|
| Fiscal year | | | (In thousands) | ||
| 2020 | | | | $ | 310,663 |
| 2021 | | | | | 345,531 |
| 2022 | | | | | 327,349 |
| 2023 | | | | | 291,561 |
| 2024 | | | | | 258,571 |
| 2025 and thereafter | | | | | 716,516 |
| Total lease payments | | | | $ | 2,250,191 |
| Less: Imputed interest | | | | | (311,844) |
| Present value of operating lease liabilities | | | | $ | 1,938,347 |
Operating lease payments exclude $214,553 of legally binding minimum lease payments for leases signed but not yet commenced.
9. Commitments and contingencies
Contractual obligations – As of February 1, 2020, the Company had obligations of $1,940 related to commitments made to a third party for products and services for a new fast fulfillment center opening in fiscal 2021. Payments under this commitment were $9,212 in fiscal 2019. In addition, the Company has entered into various non-cancelable advertising and other goods and service contracts. A majority of these agreements expire over one year and the obligations under these agreements were $33,066 as of February 1, 2020.
General litigation – The Company is involved in various legal proceedings that are incidental to the conduct of the business including both class action and single plaintiff litigation. In the opinion of management, the amount of any liability with respect to these proceedings, either individually or in the aggregate, will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.
10**. Accrued liabilities**
Accrued liabilities consist of the following:
| | | | | | | |
|---|---|---|---|---|---|---|
| | | February 1, | | February 2, | ||
| (In thousands) | 2020 | 2019 | ||||
| Accrued payroll, bonus, and employee benefits | | $ | 77,435 | | $ | 96,020 |
| Accrued taxes | | 39,051 | | 32,085 | ||
| Other accrued liabilities | | 129,602 | | 92,561 | ||
| Accrued liabilities | | $ | 246,088 | | $ | 220,666 |
11. Income taxes
The provision for income taxes consists of the following:
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| | | Fiscal | | Fiscal | | Fiscal | |||
| (In thousands) | 2019 | 2018 | 2017 | ||||||
| Current: | | | | ||||||
| Federal | | $ | 163,596 | | $ | 137,255 | | $ | 230,006 |
| State | | | 31,106 | | | 29,247 | | | 28,714 |
| Total current | | | 194,702 | | | 166,502 | | | 258,720 |
| Deferred: | | | | | | | |||
| Federal | | | 1,182 | | | 29,374 | | | (26,256) |
| State | | | 4,321 | | | 4,706 | | | (839) |
| Total deferred | | | 5,503 | | | 34,080 | | | (27,095) |
| Provision for income taxes | | $ | 200,205 | | $ | 200,582 | | $ | 231,625 |
A reconciliation of the federal statutory rate to the Company’s effective tax rate is as follows:
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| | Fiscal | | Fiscal | | Fiscal | ||||
| | 2019 | 2018 | 2017 | ||||||
| Federal statutory rate | | 21.0 | % | | 21.0 | % | | 33.7 | % |
| State effective rate, net of federal tax benefit | 3.1 | % | | 3.1 | % | | 2.4 | % | |
| Re-measurement of deferred tax liabilities | | 0.0 | % | | 0.0 | % | | (4.9) | % |
| Excess deduction of stock compensation | | (1.1) | % | | (0.6) | % | | (1.2) | % |
| Other | (0.9) | % | | (0.2) | % | | (0.6) | % | |
| Effective tax rate | 22.1 | % | | 23.3 | % | | 29.4 | % |
At February 3, 2018, the Company recorded a provisional tax expense related to the impacts of the Tax Cuts and Jobs Act (Tax Reform). The SEC issued guidance on December 22, 2017 under Staff Accounting Bulletin No. 118 (“SAB 118”) which allowed recording a provisional tax expense using a measurement period, not to exceed more than one year from the enactment date. The Company’s accounting for the impacts of the Tax Reform is complete and the Company has not recorded any material adjustments to the provisional amounts under SAB 118.
Significant components of the Company’s deferred tax assets and liabilities are as follows:
| | | | | | | |
|---|---|---|---|---|---|---|
| | February 1, | | February 2, | |||
| (In thousands) | 2020 | 2019 | ||||
| Deferred tax assets: | | | ||||
| Operating lease liability | | $ | 496,977 | | $ | — |
| Reserves not currently deductible | | | 35,626 | | | 30,669 |
| Accrued liabilities | | 27,363 | | 34,391 | ||
| Employee benefits | | 22,907 | | 18,491 | ||
| Inventory valuation | | 4,021 | | 4,107 | ||
| NOL carryforwards | | | 288 | | | 413 |
| Credit carryforwards | | 224 | | 237 | ||
| Other | | | 1,019 | | | — |
| Total deferred tax assets | | 588,425 | | 88,308 | ||
| Deferred tax liabilities: | | | ||||
| Operating lease asset | | | 567,198 | | | — |
| Property and equipment | | 61,570 | | 69,265 | ||
| Prepaid expenses | | 45,354 | | 39,915 | ||
| Receivables not currently includable | | | 2,863 | | | 1,449 |
| Intangibles | | | 807 | | | 1,018 |
| Deferred rent obligation | | — | | 60,525 | ||
| Total deferred tax liabilities | | 677,792 | | 172,172 | ||
| Net deferred tax liability | | $ | (89,367) | | $ | (83,864) |
At February 1, 2020, the Company had $224 of credit carryforwards for state income tax purposes that expire between 2024 and 2029. The Company also had $523 of state net operating loss (NOL) carryforwards that expire by 2036 and $1,145 of federal and $26 of state NOL carryforwards that do not expire.
The Company accounts for uncertainty in income taxes in accordance with the ASC 740-10 rules for income taxes. The reserve for uncertain tax positions was $3,536 and $3,844 at February 1, 2020 and February 2, 2019, respectively. The balance is the Company’s best estimate of the potential liability for uncertain tax positions. A reconciliation of the Company’s unrecognized tax benefits, excluding interest and penalties, is as follows:
| | | | | | | |
|---|---|---|---|---|---|---|
| | February 1, | | February 2, | |||
| (In thousands) | 2020 | 2019 | ||||
| Balance at beginning of the year | | $ | 3,844 | | $ | 3,565 |
| Increase due to a prior year tax position | | 602 | | 1,008 | ||
| Decrease due to a prior year tax position | | (910) | | (729) | ||
| Balance at end of the year | | $ | 3,536 | | $ | 3,844 |
The Company acknowledges that the amount of unrecognized tax benefits may change in the next twelve months. However, it does not expect the change to have a significant impact on its consolidated financial statements. Income tax-related interest and penalties were insignificant for fiscal 2019 and 2018.
The Company files tax returns in the U.S. federal and state jurisdictions. The Company is no longer subject to U.S. federal examinations by the Internal Revenue Service for years before 2018 and is no longer subject to examinations by state authorities before 2015.
12**. Notes payable**
On August 23, 2017, the Company entered into a Second Amended and Restated Loan Agreement (the Loan Agreement) with Wells Fargo Bank, National Association, as Administrative Agent, Collateral Agent and a Lender thereunder; Wells Fargo Bank, National Association and JPMorgan Chase Bank, N.A., as Lead Arrangers and Bookrunners; JPMorgan Chase Bank, N.A., as Syndication Agent and a Lender; PNC Bank, National Association, as Documentation Agent and a
Lender; and the other lenders party thereto. The Loan Agreement matures on August 23, 2022, provides maximum revolving loans equal to the lesser of $400,000 or a percentage of eligible owned inventory (which borrowing base may, at the election of the Company and satisfaction of certain conditions, include a percentage of eligible owned receivables and qualified cash), contains a $20,000 subfacility for letters of credit and allows the Company to increase the revolving facility by an additional $50,000, subject to the consent by each lender and other conditions. The Loan Agreement contains a requirement to maintain a fixed charge coverage ratio of not less than 1.0 to 1.0 during such periods when availability under the Loan Agreement falls below a specified threshold. Substantially all of the Company’s assets are pledged as collateral for outstanding borrowings under the Loan Agreement. Outstanding borrowings will bear interest at either a base rate or the London Interbank Offered Rate plus 1.25%, and the unused line fee is 0.20% per annum.
As of February 1, 2020 and February 2, 2019, the Company had no borrowings outstanding under the credit facility and the Company was in compliance with all terms and covenants of the Loan Agreement.
13. Fair value measurements
The carrying value of cash and cash equivalents, short-term investments, accounts receivable, and accounts payable approximates their estimated fair values due to the short maturities of these instruments.
Fair value is measured using inputs from the three levels of the fair value hierarchy, which are described 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 February 1, 2020 and February 2, 2019, the Company held financial liabilities included in other long-term liabilities on the consolidated balance sheets of $29,442 and $19,615, respectively, related to its non-qualified deferred compensation plan. The liabilities have been categorized as Level 2 as they are based on third-party reported values which are based primarily on quoted market prices of underlying assets of the funds within the plan.
14**. Investments**
Short-term investments typically consist of certificates of deposit and are carried at cost, which approximates fair value and are recorded in the consolidated balance sheets in short-term investments. The Company’s short-term investments as of February 1, 2020 and February 2, 2019 were $110,000 and $0, respectively.
The Company’s investments in renewable energy projects are accounted for under the equity method of accounting. The balance of these investments was $3,936 and $2,101 as of February 1, 2020 and February 2, 2019, and is included in other long-term assets on the consolidated balance sheets. The Company contributed capital of $62,946 and received distributions including $60,208 of investment tax credits during fiscal year 2019.
15**. Share-based awards**
Equity incentive plans
The Company has had a number of equity incentive plans over the years. The plans were adopted in order to attract and retain the best available personnel for positions of substantial authority and to provide additional incentive to employees and directors to promote the success of the Company’s business. All of the plans generally provided for the grant of incentive stock options, non-qualified stock options, restricted stock, restricted stock units, stock appreciation rights, and other types of awards to employees, consultants, and directors. Unless provided otherwise by the administrator of the plan, options vested over four years at the rate of 25% per year from the date of grant and must be exercised within ten years. Options were granted with the exercise price equal to the fair value of the underlying stock on the date of grant.
Amended and restated 2011 incentive award plan
In June 2016, the Company adopted the Amended and Restated 2011 Incentive Award Plan (the 2011 Plan). The 2011 Plan provides for the grant of incentive stock options, non-qualified stock options, restricted stock, restricted stock units, stock appreciation rights, performance awards, dividend equivalent rights, stock payments, deferred stock, and cash-based awards to employees, consultants, and directors. Following its original adoption in June 2011, awards are only being made under the 2011 Plan, and no further awards will be made under any prior plan. As of February 1, 2020, the 2011 Plan reserves for the issuance upon grant or exercise of awards up to 3,194 shares of the Company’s common stock.
The following table presents information related to the Company’s 2011 Incentive award plan:
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| | | Fiscal | | Fiscal | | Fiscal | |||
| 2011 Incentive award plan (in thousands) | 2019 | 2018 | 2017 | ||||||
| Compensation expense | | | | | | | | | |
| Common stock options | | $ | 8,660 | | $ | 8,590 | | $ | 8,993 |
| Restricted stock units | | | 12,762 | | | 12,077 | | | 9,507 |
| Performance-based restricted stock units | | | 4,220 | | | 6,822 | | | 5,899 |
| Total stock compensation expense | | $ | 25,642 | | $ | 27,489 | | $ | 24,399 |
| | | | | | | | | | |
| Cash received from stock option exercises | | $ | 43,780 | | $ | 13,121 | | $ | 16,190 |
| Income tax benefit | | $ | 11,600 | | $ | 6,135 | | $ | 10,024 |
Common stock options
The Company measures share-based compensation cost on the grant date, based on the fair value of the award, and recognizes the expense on a straight-line basis 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 weighted-average assumptions:
| | | | | | | | |
|---|---|---|---|---|---|---|---|
| | | | | | | | |
| | | | Fiscal | Fiscal | Fiscal | ||
| | | 2019 | 2018 | 2017 | |||
| Volatility rate | | 31.0% | | 29.0% | | 30.9% | |
| Average risk-free interest rate | | 2.3% | | 2.4% | | 1.6% | |
| Average expected life (in years) | | 3.5 | 3.4 | 3.5 | |||
| Dividend yield | | None | None | None |
The expected volatility is based on the historical volatility of the Company’s common stock. 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. The expected life of options granted is derived from historical data on Ulta Beauty stock option exercises. Forfeitures of options are estimated at the grant date based on historical rates of the Company’s stock option activity and reduce the compensation expense recognized. The Company does not currently pay a regular dividend.
The following table presents information related to the Company’s common stock options:
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| Common stock options | | Fiscal | | Fiscal | | Fiscal | |||
| (in thousands, except weighted-average grant date fair value) | 2019 | 2018 | 2017 | ||||||
| Weighted-average grant date fair value | | $ | 89.91 | | $ | 50.10 | | $ | 69.61 |
| Fair value of options vested | | | 9,143 | | | 10,042 | | | 5,656 |
| Intrinsic value of options exercised | | | 51,650 | | | 25,902 | | | 29,449 |
At February 1, 2020, there was approximately $15,621 of unrecognized compensation expense related to unvested stock options. The unrecognized compensation expense is expected to be recognized over a weighted-average period of approximately two years.
A summary of the status of the Company’s stock option activity is presented in the following table (shares in thousands):
| | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Fiscal 2019 | | Fiscal 2018 | | Fiscal 2017 | |||||||||
| | | | | | Weighted- | | | | | Weighted- | | | | | Weighted- |
| | Number of | | | average | | Number of | | | average | | Number of | | | average | |
| | options | | exercise price | options | | exercise price | options | | exercise price | ||||||
| Common stock options outstanding | | | | | | | | | | | | | | | |
| Beginning of year | | 755 | | $ | 174.34 | | 766 | | $ | 147.76 | | 830 | | $ | 120.78 |
| Granted | | 97 | | | 348.73 | | 163 | | | 204.27 | | 106 | | | 279.76 |
| Exercised | | (285) | | | 153.64 | | (166) | | | 78.81 | | (166) | | | 97.44 |
| Forfeited | | (28) | | | 263.34 | | (8) | | | 260.83 | | (4) | | | 120.71 |
| End of year | | 539 | | $ | 212.58 | | 755 | | $ | 174.34 | | 766 | | $ | 147.76 |
| Exercisable at end of year | | 172 | | $ | 159.39 | | 296 | | $ | 134.27 | | 261 | | $ | 81.72 |
| Vested and Expected to vest | | 510 | | $ | 211.14 | | 718 | | $ | 173.02 | | 725 | | $ | 145.86 |
The following table presents information related to options outstanding and options exercisable at February 1, 2020, under the Company’s stock option plans based on ranges of exercise prices (shares in thousands):
| | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Options outstanding | | Options exercisable | ||||||||||
| | | | | Weighted- | | | | | | | Weighted- | | | |
| | | | | average | | | | | | | average | | | |
| | | | | remaining | | | | | | | remaining | | | |
| | | | | contractual | | | Weighted- | | | | contractual | | | Weighted- |
| | | Number of | | life | | | average | | Number of | | life | | | average |
| Range of Exercise Prices | options | (years) | | exercise price | options | (years) | | exercise price | ||||||
| $25.80 – $57.42 | | 28 | | 1 | | $ | 47.26 | | 28 | | 1 | | $ | 47.26 |
| $57.43 – $127.15 | | 30 | | 3 | | | 92.37 | | 30 | | 3 | | | 92.37 |
| $127.16 – $165.27 | | 155 | | 6 | | | 163.70 | | 55 | | 6 | | | 163.04 |
| $165.28 – $204.27 | | 155 | | 8 | | | 201.54 | | 25 | | 7 | | | 198.39 |
| $204.28 – $281.53 | | 81 | | 7 | | | 278.76 | | 34 | | 7 | | | 278.90 |
| $281.54 – $348.73 | | 90 | | 9 | | | 348.73 | | – | | – | | | – |
| $25.80 – $348.73 | | 539 | | 7 | | $ | 212.58 | | 172 | | 5 | | $ | 159.39 |
The aggregate intrinsic value of outstanding and exercisable options as of February 1, 2020 was $38,157 and $19,120, respectively. The last reported sale price of our common stock on the NASDAQ Global Select Market on February 1, 2020 was $267.91 per share.
Restricted stock units
The Company issues restricted stock units to certain employees and its Board of Directors. Employee grants will generally cliff vest after three years and director grants will cliff vest within one year. The grant date fair value of restricted stock units is based on the closing market price of shares of the Company’s common stock on the date of grant. Restricted stock units are expensed on a straight-line basis over the requisite service period. Forfeitures of restricted stock units are estimated at the grant date based on historical rates of the Company’s stock award activity and reduce the compensation expense recognized. At February 1, 2020, unrecognized compensation cost related to restricted stock units was $20,484. The unrecognized compensation expense is expected to be recognized over a weighted-average period of approximately one and a half years.
A summary of the status of the Company’s restricted stock units activity is presented in the following table (shares in thousands):
| | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Fiscal 2019 | | Fiscal 2018 | | Fiscal 2017 | |||||||||
| | | | Weighted- | | | | Weighted- | | | | Weighted- | ||||
| | | Number of | | average grant | | Number of | | average grant | | Number of | | average grant | |||
| | units | date fair value | units | date fair value | units | date fair value | |||||||||
| Restricted stock units outstanding | | | | | | | | | | | | | | | |
| Beginning of year | | 168 | $ | 220.68 | | 134 | | $ | 207.70 | | 142 | | $ | 154.71 | |
| Granted | | 53 | | | 335.28 | | 97 | | | 208.82 | | 47 | | | 278.48 |
| Vested | | (46) | | | 207.77 | | (52) | | | 164.35 | | (46) | | | 117.61 |
| Forfeited | | (16) | | | 259.65 | | (11) | | | 227.44 | | (9) | | 201.51 | |
| End of year | | 159 | | $ | 259.21 | | 168 | | $ | 220.68 | | 134 | | $ | 207.70 |
| Expected to vest | | 147 | | $ | 259.21 | | 154 | | $ | 220.68 | | 123 | | $ | 207.70 |
Performance-based restricted stock units
The Company issues performance-based restricted stock units annually to certain employees. These awards will cliff vest after three years based upon achievement of pre-established goals at the end of the second year of the term. Consistent with restricted stock units, the grant date fair value of performance-based restricted stock units is based on the closing market price of shares of the Company’s common stock on the date of grant. Performance-based restricted stock units are expensed on a straight-line basis over the requisite service period, based on the probability of achieving the performance goal, with changes in expectations recognized as an adjustment to earnings in the period of the change. If the performance goal is not met, no compensation cost is recognized and any previously recognized compensation cost is reversed. Forfeitures of performance-based restricted stock units are estimated at the grant date based on historical rates of the Company’s stock award activity and reduce the compensation expense recognized. At February 1, 2020, unrecognized compensation cost related to performance-based restricted stock units was $6,214. The unrecognized compensation expense is expected to be recognized over a weighted-average period of approximately one year.
A summary of the status of the Company’s performance-based restricted stock unit activity is presented in the following table (shares in thousands):
| | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Fiscal 2019 | | Fiscal 2018 | | Fiscal 2017 | |||||||||
| | | | Weighted- | | | | Weighted- | | | | Weighted- | |||
| | Number of | | average | | Number of | | average | | Number of | | average | |||
| | units | grant date | units | grant date | units | grant date | ||||||||
| Performance-based restricted stock units outstanding | | | | | | | | | | | | | | |
| Beginning of year | 94 | | $ | 214.64 | | 78 | | $ | 196.81 | | 41 | | $ | 173.47 |
| Granted | 21 | | | 348.73 | | 33 | | | 204.27 | | 21 | | | 281.53 |
| Change in performance award payout | (3) | | | 281.53 | | 22 | | | 191.76 | | 19 | | | 151.20 |
| Vested | (43) | | | 191.76 | | (36) | | | 151.20 | | — | | | — |
| Forfeited | (7) | | | 258.80 | | (3) | | | 224.49 | | (3) | | | 186.90 |
| End of year | 62 | | $ | 267.60 | | 94 | | $ | 214.64 | | 78 | | $ | 196.81 |
| Expected to vest | 57 | | $ | 267.60 | | 87 | | $ | 214.64 | | 72 | | $ | 196.81 |
The number of performance-based restricted stock units granted is based on achieving the targeted performance goals as defined in the performance-based restricted stock unit agreements. As of February 1, 2020, the maximum number of units that could vest under the provisions of the agreements was 114.
16**. 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 common share:
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| | | Fiscal year ended | |||||||
| | | February 1, | | February 2, | | February 3, | |||
| (In thousands, except per share data) | | 2020 | 2019 | 2018 | |||||
| Numerator for diluted net income per share – net income | | $ | 705,945 | $ | 658,559 | $ | 555,234 | ||
| | | | | | | | | | |
| Denominator for basic net income per share – weighted-average common shares | | | 57,840 | | | 59,864 | | | 61,556 |
| Dilutive effect of stock options and non-vested stock | | | 265 | | | 317 | | | 419 |
| Denominator for diluted net income per share | | | 58,105 | | | 60,181 | | | 61,975 |
| | | | | | | | | | |
| Net income per common share: | | | | | | | | | |
| Basic | | $ | 12.21 | | $ | 11.00 | | $ | 9.02 |
| Diluted | | $ | 12.15 | | $ | 10.94 | | $ | 8.96 |
The denominator for diluted net income per common share for fiscal years 2019, 2018 and 2017 excludes 298, 302, and 167 employee stock options and restricted stock units, respectively, due to their anti-dilutive effects. Outstanding performance-based restricted stock units are included in the computation of dilutive shares only to the extent that the underlying performance conditions are satisfied prior to the end of the reporting period or would be considered satisfied if the end of the reporting period were the end of the related contingency period and the results would be dilutive under the treasury stock method.
17**. Employee benefit plans**
The Company provides a 401(k) retirement plan covering all employees who qualify as to age and length of service. The plan is funded through employee contributions and a Company match. In fiscal 2018 and 2017, the Company match was 100% of the first 3% of eligible compensation. Starting in January 2019, the Company added an additional 50% match for the next 2% of eligible compensation. The liability for the Company match included in accrued liabilities in the consolidated balance sheets was $323 and $9,617 as of February 1, 2020 and February 2, 2019, respectively. Total expense recorded under this plan is included in SG&A expenses in the consolidated statements of income and was $16,556, $10,029, and $7,570 during fiscal 2019, 2018, and 2017, respectively.
The Company also has a non-qualified deferred compensation plan for highly compensated employees whose contributions are limited under qualified defined contribution plans. The plan is funded through employee contributions and a Company match. In fiscal 2019, 2018 and 2017, the Company match was 100% of the first 3% of salary. The liability for the Company match included in accrued liabilities in the consolidated balance sheets was $693 and $1,217 as of February 1, 2020 and February 2, 2019, respectively. Amounts contributed and deferred under the plan are credited or charged with the performance of investment options offered under the plan as elected by the participants. In the event of bankruptcy, the assets of this plan are available to satisfy the claims of general creditors. The liability for compensation deferred under the Company’s plan included in other long-term liabilities in the consolidated balance sheets was $29,442 and $19,615 as of February 1, 2020 and February 2, 2019, respectively. The Company manages the risk of changes in the fair value of the liability for deferred compensation by electing to match its liability under the plan with investment vehicles that offset a substantial portion of its exposure. The cash value of the investment vehicles included in deferred compensation plan assets was $27,849 and $20,511 as of February 1, 2020 and February 2, 2019, respectively. Total expense recorded under this plan is included in SG&A expenses in the consolidated statements of income and was insignificant during fiscal 2019, 2018, and 2017.
18**. Selected quarterly financial data (unaudited)**
The following tables set forth the Company’s unaudited quarterly results of operations for each of the quarters in fiscal 2019 and fiscal 2018. The Company’s quarterly periods are the 13 weeks ending on the Saturday closest to April 30, July 31, October 31, and January 31.
| | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Fiscal 2019 | ||||||||||
| (In thousands, except per share data) | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||
| Net sales | | $ | 1,743,029 | | $ | 1,666,607 | | $ | 1,682,514 | | $ | 2,305,918 |
| Cost of sales | | | 1,098,182 | | | 1,060,708 | | | 1,059,081 | | | 1,499,033 |
| Gross profit | | | 644,847 | | | 605,899 | | | 623,433 | | | 806,885 |
| | | | | | | | | | | | | |
| Selling, general and administrative expenses | | | 403,133 | | | 392,843 | | | 449,198 | | | 515,542 |
| Pre-opening expenses | | | 4,174 | | | 5,038 | | | 6,455 | | | 3,587 |
| Operating income | | | 237,540 | | | 208,018 | | | 167,780 | | | 287,756 |
| Interest income, net | | | (2,046) | | | (1,671) | | | (900) | | | (439) |
| Income before income taxes | | | 239,586 | | | 209,689 | | | 168,680 | | | 288,195 |
| Income tax expense | | | 47,365 | | | 48,431 | | | 38,933 | | | 65,476 |
| Net income | | $ | 192,221 | | $ | 161,258 | | $ | 129,747 | | $ | 222,719 |
| | | | | | | | | | | | | |
| Net income per common share: | | | | | | | | | | | | |
| Basic | | $ | 3.28 | | $ | 2.77 | | $ | 2.25 | | $ | 3.91 |
| Diluted | | $ | 3.26 | | $ | 2.76 | | $ | 2.25 | | $ | 3.89 |
| | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Fiscal 2018 | ||||||||||
| (In thousands, except per share data) | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||
| Net sales | | $ | 1,543,667 | | $ | 1,488,221 | | $ | 1,560,011 | | $ | 2,124,716 |
| Cost of sales | | | 982,954 | | | 952,760 | | | 987,733 | | | 1,383,857 |
| Gross profit | | | 560,713 | | | 535,461 | | | 572,278 | | | 740,859 |
| | | | | | | | | | | | | |
| Selling, general and administrative expenses | | | 345,624 | | | 337,142 | | | 395,453 | | | 457,245 |
| Pre-opening expenses | | | 5,247 | | | 4,504 | | | 7,612 | | | 2,404 |
| Operating income | | | 209,842 | | | 193,815 | | | 169,213 | | | 281,210 |
| Interest income, net | | | (1,325) | | | (1,143) | | | (1,318) | | | (1,275) |
| Income before income taxes | | | 211,167 | | | 194,958 | | | 170,531 | | | 282,485 |
| Income tax expense | | | 46,771 | | | 46,635 | | | 39,365 | | | 67,811 |
| Net income | | $ | 164,396 | | $ | 148,323 | | $ | 131,166 | | $ | 214,674 |
| | | | | | | | | | | | | |
| Net income per common share: | | | | | | | | | | | | |
| Basic | | $ | 2.71 | | $ | 2.47 | | $ | 2.20 | | $ | 3.64 |
| Diluted | | $ | 2.70 | | $ | 2.46 | | $ | 2.18 | | $ | 3.61 |
The sum of the quarterly net income per common share may not equal the annual total due to quarterly changes in the weighted average shares and share equivalents outstanding.
19. Share repurchase program
On March 9, 2017, the Company announced that the Board of Directors authorized a share repurchase program (the 2017 Share Repurchase Program) pursuant to which the Company could repurchase up to $425,000 of the Company’s common stock. The 2017 Share Repurchase Program authorization revoked the previously authorized but unused amount of $79,863 from the earlier share repurchase program. The 2017 Share Repurchase Program did not have an expiration date but provided for suspension or discontinuation at any time.
On March 15, 2018, the Company announced that the Board of Directors authorized a share repurchase program (the 2018 Share Repurchase Program) pursuant to which the Company could repurchase up to $625,000 of the Company’s common stock. The 2018 Share Repurchase Program authorization revoked the previously authorized but unused amount of $41,317 from the 2017 Share Repurchase Program. The 2018 Share Repurchase Program did not have an expiration date but provided for suspension or discontinuation at any time.
On March 14, 2019, the Company announced that the Board of Directors authorized a new share repurchase program (the 2019 Share Repurchase Program) pursuant to which the Company could repurchase up to $875,000 of the Company’s common stock. The 2019 Share Repurchase Program authorization revoked the previously authorized but unused amount of $25,435 from the 2018 Share Repurchase Program. The 2019 Share Repurchase Program did not have an expiration date but provided for suspension or discontinuation at any time.
A summary of the Company’s common stock repurchase activity is presented in the following table:
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| | | Fiscal | | Fiscal | | Fiscal | |||
| (In thousands) | 2019 | 2018 | 2017 | ||||||
| Shares repurchased | | | 2,321 | | | 2,464 | | | 1,504 |
| Total cost of shares repurchased | | $ | 680,979 | | $ | 616,194 | | $ | 367,581 |
20. Subsequent event
On March 10, 2020, the Board of Directors authorized a new share repurchase program (the 2020 Share Repurchase Program) pursuant to which the Company may repurchase up to $1,600,000 of the Company’s common stock. The 2020 Share Repurchase Program authorization revoked the previously authorized but unused amounts of $214,650 from the 2019 Share Repurchase Program. The 2020 Share Repurchase Program does not have an expiration date and may be suspended or discontinued at any time.
On March 11, 2020, the Company entered into Amendment No. 1 to the Loan Agreement, which amended the existing agreement. The amendment extends the maturity of the facility to March 11, 2025, provides maximum revolving loans equal to the lesser of $1,000,000 or a percentage of eligible owned inventory and receivables, contains a $50,000 sub-facility for letters of credit and allows the Company to increase the revolving facility by an additional $100,000.
On March 11, 2020, the World Health Organization declared the new strain of the coronavirus (COVID-19) a global pandemic. Federal, state, and local governments have since implemented various restrictions, including travel restrictions, border closings, restrictions on public gatherings, quarantining of people who may have been exposed to the virus, shelter-in-place restrictions and limitations on business operations. In response to government recommendations and for the health and safety of associates and guests, the Company announced on March 17, 2020 the decision to temporarily close all stores across the U.S. until at least March 31, 2020. However, all guests can continue to shop through the Ulta Beauty app or visit ulta.com. Due to the negative impact of COVID-19 on the financial results and the uncertainty related to its duration, the Company withdrew its guidance for fiscal 2020. On March 18, 2020, as a precautionary measure and to enhance financial flexibility, the Company drew down $800,000 under the credit facility. While the Company expects this uncertain matter to negatively impact the results of operations, cash flows and financial position, the related financial impact cannot be reasonably estimated at this time.
Item 15. Exhibits and Financial Statement Schedules (Continued)
(b) Financial Statement Schedule
**Ulta Beauty, Inc.**Schedule II – Valuation and Qualifying Accounts (In thousands)
| | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Balance at | | Charged to | | | | Balance at | ||||
| | | beginning | | costs and | | | | end | ||||
| Description | of period | | expenses | | Deductions | | of period | |||||
| Fiscal 2019 | | | | | | | | | | | | |
| Allowance for doubtful accounts | $ | 651 | | $ | 1,094 | | $ | (382) | (a) | $ | 1,363 | |
| Inventory reserve | | | 36,640 | | | 50,285 | | | (39,984) | | | 46,941 |
| Fiscal 2018 | | | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 1,371 | | $ | 573 | | $ | (1,293) | (a) | $ | 651 |
| Inventory reserve | | | 24,804 | | | 47,923 | | | (36,087) | | | 36,640 |
| Fiscal 2017 | | | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 2,079 | | $ | 143 | | $ | (851) | (a) | $ | 1,371 |
| Inventory reserve | | | 27,639 | | | 39,849 | | | (42,684) | | | 24,804 |
| (a) | Represents write-off of uncollectible accounts |
|---|
All other financial statement schedules required by Form 10-K have been omitted because they were inapplicable or otherwise not required under the instructions contained in Regulation S-X.
(c) Exhibits
The exhibits listed in the Exhibit Index below are filed as part of this Annual Report on Form 10-K.
EXHIBIT INDEX
| | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | | | | Incorporated by Reference | |||||||
| Exhibit | | | | Filed | | | | Exhibit | | File | | | |
| Number | Description of document | Herewith | Form | Number | Number | Filing Date | |||||||
| 99 | | Proxy Statement for the 2020 Annual Meeting of Stockholders. [To be filed with the SEC under Regulation 14A within 120 days after February 1, 2020; except to the extent specifically incorporated by reference, the Proxy Statement for the 2020 Annual Meeting of Stockholders shall not be deemed to be filed with the SEC as part of this Annual Report on Form 10-K] | | | | | | | | | | | |
| 101.INS | | Inline XBRL Instance | | X | | | | | | | | | |
| 101.SCH | | Inline XBRL Taxonomy Extension Schema | | X | | | | | | | | | |
| 101.CAL | | Inline XBRL Taxonomy Extension Calculation | | X | | | | | | | | | |
| 101.LAB | | Inline XBRL Taxonomy Extension Labels | | X | | | | | | | | | |
| 101.PRE | | Inline XBRL Taxonomy Extension Presentation | | X | | | | | | | | | |
| 101.DEF | | Inline XBRL Taxonomy Extension Definition | | X | | | | | | | | | |
| 104 | | Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101). | | | | | | | | | | |
- A management contract or compensatory plan or arrangement.
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