Market Overview

Ulta Beauty Announces Second Quarter Fiscal 2018 Results

Share:

Net Sales Increased 15.4%

Comparable Sales Increased 6.5%

Diluted EPS Increased 34.4% to $2.46

Company Reiterates FY 2018 Guidance for Diluted EPS Growth in the Low
Twenties Percentage Range

Ulta Beauty, Inc. (NASDAQ:ULTA) today announced financial results for
the thirteen week period ("Second Quarter") and twenty-six week period
("First Six Months") ended August 4, 2018, which compares to the same
periods ended July 29, 2017.

"The Ulta Beauty team delivered a strong performance in the second
quarter, reflecting rapid growth in prestige boutique brands, mass
cosmetics, skin care and fragrance, offset by continued moderation in
the growth rates of a few of our large color cosmetics brands," said
Mary Dillon, chief executive officer. "Our flexible business model
continues to support healthy retail comps, excellent new store
productivity, and high growth for Ulta.com, resulting in significant
market share gains across categories."

Recent Accounting Pronouncement – Revenue Recognition

On February 4, 2018, the Company adopted Accounting Standards
Codification (ASC) Topic 606, Revenue from Contracts with Customers (ASC
606). The Company adopted the new revenue standard using the modified
retrospective transition method applied to all contracts with the
cumulative effect recorded to the opening balance of retaining earnings
as of the date of adoption. The comparative information has not been
restated and continues to be reported under accounting standards in
effect for those periods.

The adoption of the new revenue standard increased revenue by $9.4
million and $23.5 million for the 13 weeks and 26 weeks ended August 4,
2018, respectively. This is due to income from our credit card program
and gift card breakage now being included in net sales, as well as
e-commerce revenue now being recognized upon shipment, versus the
previous accounting treatment that was based on delivery of merchandise
to the guest. These items are partially offset by the value of points
earned in our loyalty program now reducing net sales. For the 13 weeks
and 26 weeks ended August 4, 2018, gross profit margin increased by 60
basis points and 50 basis points, respectively, while selling, general
and administrative expenses deleveraged by 80 basis points and 70 basis
points, respectively. This resulted in a net impact to operating profit
margin of 20 basis points of deleverage for both the 13 weeks and 26
weeks ended August 4, 2018. Additional information about the impact of
the adoption of ASC 606 can be found in our quarterly report on Form
10-Q available at http://ir.ultabeauty.com.

For the Second Quarter of Fiscal 2018

  • Net sales increased 15.4% to $1,488.2 million compared to $1,289.9
    million in the second quarter of fiscal 2017;
  • Comparable sales (sales for stores open at least 14 months and
    e-commerce sales) increased 6.5% compared to an increase of 11.7% in
    the second quarter of fiscal 2017. The 6.5% comparable sales increase
    was driven by 3.1% transaction growth and 3.4% growth in average
    ticket;
  • Retail comparable sales increased 4.0%, including salon comparable
    sales growth of 1.7%;
  • E-commerce sales increased 37.9% to $132.8 million compared to $96.3
    million in the second quarter of fiscal 2017, representing 250 basis
    points of the total company comparable sales increase of 6.5%;
  • Salon sales increased 8.8% to $74.0 million compared to $68.0 million
    in the second quarter of fiscal 2017;
  • Gross profit as a percentage of net sales decreased 40 basis points to
    36.0% compared to 36.4% in the second quarter of fiscal 2017, due to
    category and channel mix shifts and investments in our salon services
    and supply chain operations, partially offset by the impact of new
    revenue recognition accounting;
  • Selling, general and administrative (SG&A) expenses as a percentage of
    net sales increased 70 basis points to 22.7% compared to 22.0% in the
    second quarter of fiscal 2017, due to deleverage of investments in
    store labor to support growth initiatives and the impact of new
    revenue recognition accounting, partially offset by leverage in
    corporate overhead;
  • Pre-opening expenses decreased to $4.5 million compared to $6.1
    million in the second quarter of fiscal 2017. Real estate activity in
    the second quarter of fiscal 2018 included 19 new stores, seven
    remodels, and one relocation, compared to 20 new stores, four
    remodels, and one relocation in the second quarter of fiscal 2017;
  • Operating income increased 7.8% to $193.8 million, or 13.0% of net
    sales, compared to $179.8 million, or 14.0% of net sales, in the
    second quarter of fiscal 2017;
  • Tax rate decreased to 23.9% compared to 36.7% in the second quarter of
    fiscal 2017. The decrease was primarily due to tax reform;
  • Net income increased 29.9% to $148.3 million compared to $114.2
    million in the second quarter of fiscal 2017; and
  • Diluted earnings per share increased 34.4% to $2.46 compared to $1.83
    in the second quarter of fiscal 2017, which included a $0.02 benefit
    due to income tax accounting for share-based compensation.

For the First Six Months

  • Net sales increased 16.4% to $3,031.9 million compared to $2,604.7
    million in the first six months of fiscal 2017;
  • Comparable sales increased 7.3% compared to an increase of 13.0% in
    the first six months of fiscal 2017. The 7.3% comparable sales
    increase was driven by 4.1% transaction growth and 3.2% growth in
    average ticket;
  • Retail comparable sales increased 4.3%, including salon comparable
    sales growth of 2.5%;
  • E-commerce sales increased 43.2% to $287.2 million compared to $200.6
    million in the first six months of fiscal 2017, representing 300 basis
    points of the total company comparable sales increase of 7.3%;
  • Salon sales increased 9.4% to $149.7 million compared to $136.8
    million in the first six months of fiscal 2017;
  • Gross profit as a percentage of net sales decreased 10 basis points to
    36.2% compared to 36.3% in the first six months of fiscal 2017, due to
    category and channel mix shifts and investments in our salon services,
    partially offset by the impact of new revenue recognition accounting;
  • SG&A expenses as a percentage of net sales increased 70 basis points
    to 22.5% compared to 21.8% in the first six months of fiscal 2017, due
    to deleverage from investments in store labor to support growth
    initiatives and the impact of new revenue recognition accounting,
    partially offset by leverage in corporate overhead;
  • Pre-opening expenses decreased to $9.8 million compared to $10.3
    million in the first six months of 2017. Real estate activity in the
    first six months of 2018 included 53 new stores, nine remodels, and
    one relocation, compared to 38 new stores, five remodels, and three
    relocations in the first six months of fiscal 2017;
  • Operating income increased 9.6% to $403.7 million, or 13.3% of net
    sales, compared to $368.2 million, or 14.2% of net sales, in the first
    six months of fiscal 2017;
  • Tax rate decreased to 23.0% compared to 34.3% in the first six months
    of fiscal 2017. The decrease was primarily due to tax reform;
  • Net income increased 29.0% to $312.7 million compared to $242.4
    million in the first six months of fiscal 2017; and
  • Diluted earnings per share increased 33.0% to $5.16, including a
    benefit of $0.07 due to income tax accounting for share-based
    compensation, compared to $3.88 in the first six months of fiscal
    2017, which included a $0.16 benefit due to income tax accounting for
    share based compensation.

Balance Sheet

Merchandise inventories at the end of the second quarter of fiscal 2018
totaled $1,219.7 million compared to $1,144.7 million at the end of the
second quarter of fiscal 2017, representing an increase of $75.0
million. The increase in total inventory was driven by 114 net new
stores and the opening of the Company's distribution center in Fresno,
California, partially offset by inventory productivity benefits from
supply chain investments in new systems and merchandise planning tools.
Average inventory per store decreased 4.3% compared to the second
quarter of fiscal 2017.

The Company ended the second quarter of fiscal 2018 with $386.1 million
in cash and short-term investments.

Share Repurchase Program

During the second quarter of fiscal 2018, the Company repurchased
512,143 shares of its stock at a cost of $127.4 million. Year to date
fiscal 2018, the Company has repurchased 1,130,694 shares at a cost of
$260.5 million. As of August 4, 2018, $401.8 million remained available
under the $625.0 million share repurchase program announced in
March 2018.

Store Expansion

During the second quarter of fiscal 2018, the Company opened 19 stores
located in Auburn, WA; Crystal Lake, IL; Greer, SC; Hamilton, NJ;
Hingham, MA; Kahului, HI; New Caney, TX; Owasso, OK; Pico Rivera, CA;
Pinecrest, FL; Riverton, UT; Sacramento, CA; Salem, OR; Seneca, SC; St.
Charles, IL; Staten Island, NY; Wall Township, NJ; Walla Walla, WA and
Wethersfield, CT. In addition, the Company closed two stores. The
Company ended the second quarter of fiscal 2018 with 1,124 stores and
square footage of 11,824,009, representing an 11.2% increase in square
footage compared to the second quarter of fiscal 2017.

Outlook

For the third quarter of fiscal 2018, the Company expects net sales in
the range of $1,550.0 million to $1,563.0 million, compared to actual
net sales of $1,342.2 million in the third quarter of fiscal 2017.
Comparable sales for the third quarter of fiscal 2018, including
e-commerce sales, are expected to increase 7% to 8%. The Company
reported a comparable sales increase of 10.3% in the third quarter of
fiscal 2017.

Diluted earnings per share for the third quarter of fiscal 2018 is
estimated to be in the range of $2.11 to $2.16. This compares to diluted
earnings per share for the third quarter of fiscal 2017 of $1.70.

For fiscal 2018, the Company plans to:

  • increase total sales in the low teens percentage range;
  • achieve comparable sales growth of approximately 6% to 8%;
  • grow e-commerce sales in the 40% range;
  • open approximately 100 new stores and execute 15 remodel or relocation
    projects;
  • deleverage operating profit margin rate in the range of 50 to 70 basis
    points;
  • deliver diluted earnings per share growth in the low twenties
    percentage range, including the impact of approximately $500 million
    in share repurchases and assuming a 24% effective tax rate; and
  • incur capital expenditures of $375 million in fiscal 2018, compared to
    fiscal 2017 capital expenditures of $441 million.

Non-GAAP Financial Information

The Company has used non-GAAP financial measures in this press release.
Adjusted financial measures refer to financial information adjusted to
exclude from financial measures prepared in accordance with accounting
principles generally accepted in the United States (GAAP) items
identified in this press release. The Company believes that the
presentation of adjusted financial results provides additional
information on comparisons between periods by excluding certain items
that affect overall comparability. Non-GAAP financial measures should be
considered in addition to, and not as an alternative for, the Company's
reported results prepared in accordance with GAAP.

Conference Call Information

A conference call to discuss second quarter of fiscal 2018 results is
scheduled for today, August 30, 2018, at 5:00 p.m. Eastern Time /
4:00 p.m. Central Time. Investors and analysts interested in
participating in the call are invited to dial (877) 705-6003. The
conference call will also be webcast live at http://ir.ultabeauty.com.
A replay of the webcast will remain available for 90 days. A replay of
the conference call will be available until 11:59 p.m. ET on September
13, 2018 and can be accessed by dialing (844) 512-2921 and entering
conference ID number 13682124.

About Ulta Beauty

Ulta Beauty is the largest beauty retailer in the United States and the
premier beauty destination for cosmetics, fragrance, skin, hair care
products and salon services. Since opening its first store in 1990, Ulta
Beauty has grown to become the top national retailer providing All
Things Beauty. All in One Place.™ The Company offers more than 20,000
products from approximately 500 well-established and emerging beauty
brands across all categories and price points, including Ulta Beauty's
own private label. Ulta Beauty also offers a full-service salon in every
store featuring hair, skin, and brow services. Ulta Beauty is recognized
for its commitment to personalized service, fun, and inviting stores and
its industry-leading Ultamate Rewards loyalty program. As of August
4, 2018, Ulta Beauty operates 1,124 retail stores across 49 states and
also distributes its products through its website, which includes a
collection of tips, tutorials, and social content. For more information,
visit www.ulta.com.

Forward-Looking Statements

This press release contains forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as
amended, and the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, which reflect our current views with
respect to, among other things, future events and financial performance.
You can identify these forward-looking statements by the use of
forward-looking words such as "outlook," "believes," "expects," "plans,"
"estimates," "targets," "strategies" or other comparable words. Any
forward-looking statements contained in this press release are based
upon our historical performance and on current plans, estimates and
expectations. The inclusion of this forward-looking information should
not be regarded as a representation by us or any other person that the
future plans, estimates, targets, strategies or expectations
contemplated by us will be achieved. Such forward-looking statements are
subject to various risks and uncertainties, which include, without
limitation: changes in the overall level of consumer spending and
volatility in the economy; the possibility that we may be unable to
compete effectively in our highly competitive markets; the possibility
that cybersecurity breaches and other disruptions could compromise our
information or result in the unauthorized disclosure of confidential
information; our ability to gauge beauty trends and react to changing
consumer preferences in a timely manner; our ability to attract and
retain key executive personnel; the possibility that the capacity of our
distribution and order fulfillment infrastructure and the performance of
our newly opened and to be opened distribution centers may not be
adequate to support our recent growth and expected future growth plans;
our ability to sustain our growth plans and successfully implement our
long-range strategic and financial plan; the possibility of material
disruptions to our information systems; changes in the wholesale cost of
our products; the possibility that new store openings and existing
locations may be impacted by developer or co-tenant issues; natural
disasters that could negatively impact sales; our ability to
successfully execute our common stock repurchase program or implement
future common stock repurchase programs; and other risk factors detailed
in our public filings with the Securities and Exchange Commission (the
"SEC"), including risk factors contained in our Annual Report on
Form 10-K for the fiscal year ended February 3, 2018, as such may be
amended or supplemented in our subsequently filed Quarterly Reports on
Form 10-Q. Our filings with the SEC are available at
www.sec.gov.
Except to the extent required by the federal securities laws, the
Company does not undertake to publicly update or revise its
forward-looking statements, whether as a result of new information,
future events or otherwise.

 

Exhibit 1

Ulta Beauty, Inc.
Consolidated Statements of Income
(In thousands, except per share data)
       
13 Weeks Ended
August 4, July 29,
2018   2017  
(Unaudited) (Unaudited)
Net sales $ 1,488,221 100.0 % $ 1,289,854 100.0 %
Cost of sales   952,760   64.0 %   820,528   63.6 %
Gross profit 535,461 36.0 % 469,326 36.4 %
 
Selling, general and administrative expenses 337,142 22.7 % 283,427 22.0 %
Pre-opening expenses   4,504   0.3 %   6,099   0.5 %
Operating income 193,815 13.0 % 179,800 14.0 %
Interest income, net   (1,143 ) 0.1 %   (555 ) 0.0 %
Income before income taxes 194,958 13.1 % 180,355 14.0 %
Income tax expense   46,635   3.1 %   66,162   5.1 %
Net income $ 148,323   10.0 % $ 114,193   8.9 %
 
Net income per common share:
Basic $ 2.47 $ 1.84
Diluted $ 2.46 $ 1.83
 
Weighted average common shares outstanding:
Basic 60,070 61,935
Diluted 60,375 62,379
 

Exhibit 2

Ulta Beauty, Inc.
Consolidated Statements of Income
(In thousands, except per share data)
       
26 Weeks Ended
August 4, July 29,
2018   2017  
(Unaudited) (Unaudited)
Net sales $ 3,031,888 100.0 % $ 2,604,733 100.0 %
Cost of sales   1,935,714   63.8 %   1,659,399   63.7 %
Gross profit 1,096,174 36.2 % 945,334 36.3 %
 
Selling, general and administrative expenses 682,766 22.5 % 566,872 21.8 %
Pre-opening expenses   9,751   0.3 %   10,257   0.4 %
Operating income 403,657 13.3 % 368,205 14.2 %
Interest income, net   (2,468 ) 0.1 %   (893 ) 0.0 %
Income before income taxes 406,125 13.4 % 369,098 14.2 %
Income tax expense   93,406   3.1 %   126,682   4.9 %
Net income $ 312,719   10.3 % $ 242,416   9.3 %
 
Net income per common share:
Basic $ 5.18 $ 3.91
Diluted $ 5.16 $ 3.88
 
Weighted average common shares outstanding:
Basic 60,340 62,018
Diluted 60,630 62,483
 

Exhibit 3

Ulta Beauty, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
     
August 4, February 3, July 29,
2018 2018 2017
(Unaudited) (Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 237,107 $ 277,445 $ 92,860
Short-term investments 149,000 120,000 180,000
Receivables, net 103,666 99,719 67,593
Merchandise inventories, net 1,219,685 1,096,424 1,144,702
Prepaid expenses and other current assets 103,618 98,666 98,215
Prepaid income taxes   17,082 1,489 9,124
Total current assets 1,830,158 1,693,743 1,592,494
 
Property and equipment, net 1,212,978 1,189,453 1,095,135
Deferred compensation plan assets 19,585 16,827 14,588
Other long-term assets   10,628   8,664  
Total assets $ 3,073,349 $ 2,908,687 $ 2,702,217
 
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 409,849 $ 325,758 $ 313,483
Accrued liabilities 348,906 302,307 256,794
Accrued income taxes     14,101  
Total current liabilities 758,755 642,166 570,277
 
Deferred rent 422,455 407,916 387,670
Deferred income taxes 49,700 59,403 85,181
Other long-term liabilities   29,961   24,985   23,739
Total liabilities 1,260,871 1,134,470 1,066,867
 
Commitments and contingencies
 
Total stockholders' equity   1,812,478   1,774,217   1,635,350
Total liabilities and stockholders' equity $ 3,073,349 $ 2,908,687 $ 2,702,217
 

Exhibit 4

Ulta Beauty, Inc.

Consolidated Statements of Cash Flows
(In thousands)
   
26 Weeks Ended
August 4, July 29,
2018     2017  
(Unaudited)
Operating activities
Net income $ 312,719 $ 242,416
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 137,815 125,582
Deferred income taxes 612 (1,317 )
Non-cash stock compensation charges 13,172 11,649
Loss on disposal of property and equipment 499 2,348
Change in operating assets and liabilities:
Receivables (3,947 ) 21,038
Merchandise inventories (123,261 ) (200,727 )
Prepaid expenses and other current assets (4,952 ) (9,594 )
Income taxes (29,694 ) (18,095 )
Accounts payable 84,091 53,965
Accrued liabilities (13,149 ) (29,557 )
Deferred rent 14,539 21,479
Other assets and liabilities   (441 )   806  
Net cash provided by operating activities 388,003 219,993
 
Investing activities
Purchases of short-term investments (558,163 ) (240,000 )
Proceeds from short-term investments 529,163 90,000
Purchases of property and equipment   (141,691 )   (193,210 )
Net cash used in investing activities (170,691 ) (343,210 )
 
Financing activities
Repurchase of common shares (260,452 ) (178,085 )
Stock options exercised 8,448 13,179
Purchase of treasury shares   (5,646 )   (4,027 )
Net cash used in financing activities   (257,650 )   (168,933 )
 
Net decrease in cash and cash equivalents (40,338 ) (292,150 )
Cash and cash equivalents at beginning of period   277,445     385,010  
Cash and cash equivalents at end of period $ 237,107   $ 92,860  
 
Exhibit 5

 

       

2018 Store Expansion

 
Total stores open Number of stores Number of stores Total stores
at beginning of the opened during the closed during the open at
Fiscal 2018 quarter quarter quarter end of the quarter
1st Quarter 1,074 34 1 1,107
2nd Quarter 1,107 19 2 1,124
    Gross square feet for    
Total gross square stores opened or Gross square feet for Total gross square
feet at beginning of expanded during the stores closed feet at end of the
Fiscal 2018 the quarter quarter during the quarter quarter
1st Quarter 11,300,920 355,482 10,607 11,645,795
2nd Quarter 11,645,795 198,852 20,638 11,824,009
 

Exhibit 6

Ulta Beauty, Inc.
Pro-forma Effect of ASC 606
(In thousands)
(Unaudited)
 

The Company adopted ASC 606 and the related amendments as of
February 4, 2018 using the modified retrospective transition
method applied to all contracts. The comparative information has
not been restated and continues to be reported under accounting
standards in effect for those periods. The following table
presents selected as-reported financial results and the pro-forma
effect of ASC 606 as if the recognition and presentation guidance
in the accounting standard had been applied in fiscal 2017. The
fiscal 2017 pro-forma financial information included in the table
below is presented for information purposes only.

 

         
Fiscal Year Ended February 3, 2018
Balances
with
% of ASC 606 Adoption

(Dollars in thousands)

As Reported Sales Adjustments of ASC 606 % of Sales
Consolidated Statement of Income:
Net sales $ 5,884,506 100.0 % $ 31,197 $ 5,915,703 100.0 %
Cost of sales 3,787,697 64.4 % (5,746 ) 3,781,951 63.9 %
Gross profit 2,096,809 35.6 % 36,944 2,133,753 36.1 %
Selling, general and administrative expenses 1,287,232 21.9 % 40,730 1,327,962 22.4 %
Operating income 785,291 13.3 % (3,786 ) 781,505 13.2 %
Income tax expense 231,625 3.9 % (1,707 ) 229,918 3.9 %
Net income 555,234 9.4 % (2,079 ) 553,155 9.4 %
 

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