Item 2.
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Managements Discussion and Analysis of Financial Condition and Results of Operations
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The
following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes included elsewhere in this quarterly report. This discussion contains
forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, 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 Form
10-Q
are based upon our historical performance and on current
plans, estimates and expectations. The inclusion of this forward-looking information should not be regarded as a representation by us or any other person that the future plans, estimates, 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:
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the impact of weakness in the economy;
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changes in the overall level of consumer spending;
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the possibility that we may be unable to compete effectively in our highly competitive markets;
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the possibility that cybersecurity breaches and other disruptions could compromise our information or result in the unauthorized disclosure of confidential information;
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weather conditions that could negatively impact sales;
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our ability to gauge beauty trends and react to changing consumer preferences in a timely manner;
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our ability to attract and retain key executive personnel;
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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;
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our ability to sustain our growth plans and successfully implement our long-range strategic and financial plan;
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the possibility that our continued opening of new stores could strain our resources and have a material adverse effect on our business and financial performance;
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the possibility of material disruptions to our information systems;
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changes in the wholesale cost of our products;
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the possibility that new store openings and existing locations may be impacted by developer or
co-tenant
issues;
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customer acceptance of our rewards program and technological and marketing initiatives;
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our ability to successfully execute our common stock repurchase program or implement future common stock repurchase programs; and
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other risk factors detailed in our public filings with the Securities and Exchange Commission (the SEC), including risk factors contained in Item 1A, Risk Factors of our Annual Report on Form
10-K
for the year ended January 28, 2017,
as such may be amended or supplemented in our subsequently filed Quarterly Reports on Form
10-Q
(including this report).
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Except to the extent required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
References in the following discussion to we, us,
our, Ulta Beauty, the Company, and similar references mean Ulta Beauty, Inc. and its consolidated subsidiaries, unless otherwise expressly stated or the context otherwise requires.
Overview
We were founded in 1990 as a beauty retailer at
a time when prestige, mass and salon products were sold through distinct channels department stores for prestige products, drug stores and mass merchandisers for mass products and salons and authorized retail outlets for professional hair
care products. We developed a unique specialty retail concept that offers All Things Beauty. All in One Place.
TM
, a compelling value proposition and a convenient and welcoming shopping
environment. We believe our strategy provides us with the competitive advantages that have contributed to our financial performance.
On January 29,
2017, we implemented a holding company reorganization (the Reorganization) pursuant to which 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, Inc.
15
We are the largest beauty retailer in the United States and the premier beauty destination for cosmetics,
fragrance, skin care products, hair care products and salon services. We focus on providing affordable indulgence to our guests by combining unmatched product breadth, value and convenience with a distinctive specialty retail environment and
experience. Key aspects of our business include: our ability to offer our guests a unique combination of more than 20,000 beauty products across the categories of prestige and mass cosmetics, fragrance, haircare, skincare, bath and body products and
salon styling tools, as well as a full-service salon in every store featuring hair, skin and brow services; our focus on delivering a compelling value proposition to our guests across all of our product categories; and convenience, as our stores are
predominantly located in convenient, high-traffic locations such as power centers.
The continued growth of our business and any future increases in net
sales, net income and cash flows is dependent on our ability to execute our strategic imperatives: 1) acquire new guests and deepen loyalty with existing guests, 2) differentiate by delivering a distinctive and personalized guest experience across
all channels, 3) offer relevant, innovative and often exclusive products that excite our guests, 4) deliver exceptional services in three core areas: hair, skin health and brows, 5) grow stores and
e-commerce
to reach and serve more guests, 6) invest in infrastructure to support our guest experience and growth, and capture scale efficiencies and 7) attract and retain talent that drives a winning culture. We believe that the expanding U.S. beauty products
and salon services industry, and the shift in distribution channel of prestige beauty products from department stores to specialty retail stores, coupled with Ulta Beautys competitive strengths, positions us to capture additional market share
in the industry.
Comparable sales is a key metric that is monitored closely within the retail industry. Our comparable sales have fluctuated in the past
and we expect them to continue to fluctuate in the future. A variety of factors affect our comparable sales, including general U.S. economic conditions, changes in merchandise strategy or mix and timing and effectiveness of our marketing activities,
among others.
Over the long-term, our growth strategy is to increase total net sales through increases in our comparable sales, by opening new stores and
by increasing sales in our
e-commerce
channel. Operating profit is expected to increase as a result of our ability to leverage our fixed store costs and supply chain investments.
Basis of presentation
We have determined the operating
segments on the same basis that we use to internally evaluate performance. We have combined our three operating segments: retail stores, salon services and
e-commerce,
into one reportable segment because they
have a similar class of consumers, economic characteristics, nature of products and distribution methods.
Net sales include store and
e-commerce
merchandise sales as well as salon service revenue. We recognize merchandise revenue at the point of sale in our retail stores and
e-commerce
sales are recorded
based on delivery of merchandise to the guest. Store and
e-commerce
sales are recorded net of estimated returns. Salon service revenue is recognized at the time the service is provided. Gift card sales revenue
is deferred until the guest redeems the gift card. Company coupons and other incentives are recorded as a reduction of net sales.
Comparable sales
reflect sales for stores beginning on the first day of the 14th month of operation. Therefore, a store is included in our comparable store base on the first day of the period after one year of operations plus the initial one month grand opening
period.
Non-comparable
store sales include sales from new stores that have not yet completed their 13th month of operation and stores that were closed for part or all of the period in either year as a
result of remodel activity. Remodeled stores are included in comparable sales unless the store was closed for a portion of the current or prior period. Comparable sales include the Companys
e-commerce
business. There may be variations in the way in which some of our competitors and other retailers calculate comparable or same store sales.
Measuring
comparable sales allows us to evaluate the performance of our store base as well as several other aspects of our overall strategy. Several factors could positively or negatively impact our comparable sales results:
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the general national, regional and local economic conditions and corresponding impact on customer spending levels;
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the introduction of new products or brands;
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the location of new stores in existing store markets;
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our ability to respond on a timely basis to changes in consumer preferences;
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the effectiveness of our various marketing activities; and
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the number of new stores opened and the impact on the average age of all of our comparable stores.
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16
Cost of sales includes:
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the cost of merchandise sold (retail and
e-commerce),
including substantially all vendor allowances, which are treated as a reduction of merchandise costs;
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warehousing and distribution costs including labor and related benefits, freight, rent, depreciation and amortization, real estate taxes, utilities and insurance;
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shipping and handling costs;
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store occupancy costs including rent, depreciation and amortization, real estate taxes, utilities, repairs and maintenance, insurance, licenses and cleaning expenses;
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salon payroll and benefits;
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customer loyalty program expense; and
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shrink and inventory valuation reserves.
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Our cost of sales may be negatively impacted as we open an
increasing number of stores. Changes in our merchandise mix may also have an impact on cost of sales. This presentation of items included in cost of sales may not be comparable to the way in which our competitors or other retailers compute cost of
sales.
Selling, general and administrative expenses include:
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payroll, bonus and benefit costs for retail and corporate employees;
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advertising and marketing costs;
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credit card program incentives;
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occupancy costs related to our corporate office facilities;
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stock-based compensation expense;
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depreciation and amortization for all assets, except those related to our retail and warehouse operations, which are included in cost of sales; and
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legal, finance, information systems and other corporate overhead costs.
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This presentation of items in
selling, general and administrative expenses may not be comparable to the way in which our competitors or other retailers compute selling, general and administrative expenses.
Pre-opening
expenses include
non-capital
expenditures during the period prior
to store opening for new, remodeled and relocated stores including rent during the construction period for new and relocated stores, store
set-up
labor, management and employee training, and grand opening
advertising.
Interest income, net includes both interest income and expense. Interest income represents interest from cash equivalents and short-term
investments with maturities of twelve months or less from the date of purchase. Interest expense includes interest costs and unused facility fees associated with our credit facility, which is structured as an asset-based lending instrument. Our
credit facility interest is based on a variable interest rate structure which can result in increased cost in periods of rising interest rates.
Income
tax expense reflects the federal statutory tax rate and the weighted average state statutory tax rate for the states in which we operate stores.
17
Results of operations
Our quarterly periods are the 13 weeks ending on the Saturday closest to April 30, July 31, October 31 and January 31. The Companys second
quarter in fiscal 2017 and 2016 ended on July 29, 2017 and July 30, 2016, respectively. Our quarterly results of operations have varied in the past and are likely to do so again in the future. As such, we believe that
period-to-period
comparisons of our results of operations should not be relied upon as an indication of our future performance.
The following table presents the components of our consolidated results of operations for the periods indicated:
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13 Weeks Ended
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26 Weeks Ended
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(Dollars in thousands)
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July 29,
2017
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July 30,
2016
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July 29,
2017
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July 30,
2016
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Net sales
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$
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1,289,854
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$
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1,069,215
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$
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2,604,733
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$
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2,142,931
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Cost of sales
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820,528
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684,377
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1,659,399
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1,367,663
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Gross profit
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469,326
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384,838
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945,334
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775,268
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Selling, general and administrative expenses
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283,427
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236,380
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566,872
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477,104
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Pre-opening expenses
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6,099
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4,689
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10,257
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7,231
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Operating income
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179,800
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|
|
143,769
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368,205
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290,933
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Interest income, net
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(555
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)
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(248
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)
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(893
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)
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(563
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)
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Income before income taxes
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180,355
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144,017
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|
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369,098
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291,496
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Income tax expense
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|
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66,162
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54,013
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126,682
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|
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109,516
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Net income
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$
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114,193
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$
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90,004
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$
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242,416
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$
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181,980
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Other operating data:
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Number of stores end of period
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1,010
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|
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907
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1,010
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907
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Comparable sales increase:
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Retail and salon comparable sales
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8.3
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%
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12.6
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%
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9.6
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%
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13.3
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%
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E-commerce comparable sales
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72.3
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%
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54.9
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%
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|
71.6
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%
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|
46.0
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%
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|
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|
|
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Total comparable sales increase
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11.7
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%
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|
|
14.4
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%
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|
|
13.0
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%
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|
|
14.8
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%
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13 Weeks Ended
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26 Weeks Ended
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(Percentage of net sales)
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July 29,
2017
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July 30,
2016
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July 29,
2017
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July 30,
2016
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Net sales
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|
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100.0
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%
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100.0
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%
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|
|
100.0
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%
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|
|
100.0
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%
|
Cost of sales
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|
|
63.6
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%
|
|
|
64.0
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%
|
|
|
63.7
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%
|
|
|
63.8
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%
|
|
|
|
|
|
|
|
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|
|
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|
|
|
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|
Gross profit
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|
|
36.4
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%
|
|
|
36.0
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%
|
|
|
36.3
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%
|
|
|
36.2
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%
|
|
|
|
|
|
Selling, general and administrative expenses
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|
|
22.0
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%
|
|
|
22.1
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%
|
|
|
21.8
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%
|
|
|
22.3
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%
|
Pre-opening expenses
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|
|
0.5
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%
|
|
|
0.4
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%
|
|
|
0.4
|
%
|
|
|
0.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
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|
|
14.0
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%
|
|
|
13.5
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%
|
|
|
14.2
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%
|
|
|
13.6
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%
|
Interest income, net
|
|
|
0.0
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%
|
|
|
0.0
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%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
14.0
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%
|
|
|
13.5
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%
|
|
|
14.2
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%
|
|
|
13.6
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%
|
Income tax expense
|
|
|
5.1
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%
|
|
|
5.1
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%
|
|
|
4.9
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%
|
|
|
5.1
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%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
8.9
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%
|
|
|
8.4
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%
|
|
|
9.3
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%
|
|
|
8.5
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%
|
|
|
|
|
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18
Comparison of 13 weeks ended July 29, 2017 to 13 weeks ended July 30, 2016
Net sales
Net sales increased $220.6 million
or 20.6%, to $1,289.9 million for the 13 weeks ended July 29, 2017, compared to $1,069.2 million for the 13 weeks ended July 30, 2016. Salon service sales increased $9.0 million or 15.3%, to $68.0 million compared to
$59.0 million in the second quarter of 2016.
E-commerce
sales increased $40.4 million or 72.3%, to $96.3 million compared to $55.9 million in the second quarter of 2016. The net sales
increase is due to comparable stores driving an increase of $123.9 million and an increase in
non-comparable
stores of $96.7 million compared to the second quarter of 2016.
The 11.7% comparable sales increase consisted of an 8.3% increase at the Companys retail and salon stores and a 72.3% increase in the Companys
e-commerce
business. The inclusion of the
e-commerce
business resulted in an increase of approximately 340 basis points to the Companys consolidated same store sales
calculation for the 13 weeks ended July 29, 2017, compared to 180 basis points for the 13 weeks ended July 30, 2016. The total comparable sales increase included a 5.5% increase in transactions and a 6.2% increase in average ticket. We
attribute the increase in comparable sales to our successful marketing and merchandising strategies.
Gross profit
Gross profit increased $84.5 million or 22.0%, to $469.3 million for the 13 weeks ended July 29, 2017, compared to $384.8 million for the
13 weeks ended July 30, 2016. Gross profit as a percentage of net sales increased 40 basis points to 36.4% for the 13 weeks ended July 29, 2017, compared to 36.0% for the 13 weeks ended July 30, 2016. The increase in gross profit
margin was primarily due to improvements in merchandise margins and leverage in fixed store costs.
Selling, general and administrative expenses
Selling, general and administrative (SG&A) expenses increased $47.0 million or 19.9%, to $283.4 million for the 13 weeks ended
July 29, 2017, compared to $236.4 million for the 13 weeks ended July 30, 2016. SG&A as a percentage of net sales decreased 10 basis points to 22.0% for the 13 weeks ended July 29, 2017, compared to 22.1% for the 13 weeks
ended July 30, 2016. The decrease is due to leverage in corporate overhead and variable store expenses attributed to cost efficiencies and higher sales volume, partially offset by investments in store labor to support growth initiatives.
Pre-opening
expenses
Pre-opening
expenses increased $1.4 million to $6.1 million for the 13 weeks ended July 29, 2017,
compared to $4.7 million for the 13 weeks ended July 30, 2016. During the 13 weeks ended July 29, 2017, we opened 20 new stores, relocated one store and remodeled four stores, compared to 24 new store openings, one store relocation
and five remodeled stores during the 13 weeks ended July 30, 2016.
Interest income, net
Interest income, net was $0.6 million for the 13 weeks ended July 29, 2017 compared to $0.2 million for the 13 weeks ended July 30, 2016.
Interest income results from cash equivalents and short-term investments with maturities of twelve months or less from the date of purchase. Interest expense represents various fees related to the credit facility. We did not utilize our credit
facility during the second quarter of fiscal 2017 or 2016.
Income tax expense
Income tax expense of $66.2 million for the 13 weeks ended July 29, 2017 represents an effective tax rate of 36.7%, compared to $54.0 million of
tax expense representing an effective tax rate of 37.5% for the 13 weeks ended July 30, 2016. The lower tax rate is primarily due to a tax benefit resulting from the Companys adoption of a new accounting standard for employee share-based
payments. See Note 2 to our consolidated financial statements, Summary of significant accounting policies Recently adopted accounting pronouncements.
Net income
Net income increased
$24.2 million or 26.9%, to $114.2 million for the 13 weeks ended July 29, 2017, compared to $90.0 million for the 13 weeks ended July 30, 2016. The increase is primarily related to the $84.5 million increase in gross
profit, partially offset by a $47.0 million increase in SG&A expenses and a $12.1 million increase in income tax expense.
19
Comparison of 26 weeks ended July 29, 2017 to 26 weeks ended July 30, 2016
Net sales
Net sales increased $461.8 million
or 21.6%, to $2,604.7 million for the 26 weeks ended July 29, 2017, compared to $2,142.9 million for the 26 weeks ended July 30, 2016. Salon service sales increased $18.9 million or 16.0%, to $136.8 million compared to
$117.9 million in the first 26 weeks of fiscal 2016.
E-commerce
sales increased $83.7 million or 71.6%, to $200.6 million compared to $116.9 million in the first 26 weeks of fiscal 2016.
The net sales increase is due to comparable stores driving an increase of $275.7 million and an increase in
non-comparable
stores of $186.1 million compared to the first 26 weeks of fiscal 2016.
The 13.0% comparable sales increase consisted of a 9.6% increase at the Companys retail and salon stores and a 71.6% increase in the Companys
e-commerce
business. The inclusion of the
e-commerce
business resulted in an increase of approximately 340 basis points to the Companys consolidated same store sales
calculation for the 26 weeks ended July 29, 2017 compared to 150 basis points for the 26 weeks ended July 30, 2016. The total comparable sales increase included a 7.1% increase in transactions and a 5.9% increase in average ticket. We
attribute the increase in comparable sales to our successful marketing and merchandising strategies.
Gross profit
Gross profit increased $170.1 million or 21.9%, to $945.3 million for the 26 weeks ended July 29, 2017, compared to $775.3 million for the
26 weeks ended July 30, 2016. Gross profit as a percentage of net sales increased 10 basis points to 36.3% for the 26 weeks ended July 29, 2017, compared to 36.2% for the 26 weeks ended July 30, 2016. The increase in gross profit
margin was primarily due to improvements in merchandise margins and leverage in fixed store costs.
Selling, general and administrative expenses
SG&A expenses increased $89.8 million or 18.8%, to $566.9 million for the 26 weeks ended July 29, 2017, compared to
$477.1 million for the 26 weeks ended July 30, 2016. As a percentage of net sales, SG&A expenses decreased 50 basis points to 21.8% for the 26 weeks ended July 29, 2017, compared to 22.3% for the 26 weeks ended July 30, 2016.
The decrease is due to leverage in corporate overhead and variable store expenses attributed to cost efficiencies and higher sales volume, partially offset by investments in store labor to support growth initiatives.
Pre-opening
expenses
Pre-opening
expense increased $3.1 million to $10.3 million for the 26 weeks ended July 29, 2017,
compared to $7.2 million for the 26 weeks ended July 30, 2016. During the 26 weeks ended July 29, 2017, we opened 38 new stores, relocated three stores and remodeled five stores, compared to 37 new store openings, one relocated store
and five remodeled stores during the 26 weeks ended July 30, 2016.
Interest income, net
Interest income, net was $0.9 million for the 26 weeks ended July 29, 2017, compared to $0.6 million for the 26 weeks ended July 30, 2016.
Interest income results from cash equivalents and short-term investments with maturities of twelve months or less from the date of purchase. Interest expense represents various fees related to the credit facility. We did not utilize our credit
facility during the first 26 weeks of fiscal 2017 or 2016.
Income tax expense
Income tax expense of $126.7 million for the 26 weeks ended July 29, 2017 represents an effective tax rate of 34.3%, compared to $109.5 million
of tax expense representing an effective tax rate of 37.6% for the 26 weeks ended July 30, 2016. The lower tax rate is primarily due to a tax benefit resulting from the Companys adoption of a new accounting standard for employee
share-based payments. See Note 2 to our consolidated financial statements, Summary of significant accounting policies Recently adopted accounting pronouncements.
Net income
Net income increased
$60.4 million or 33.2%, to $242.4 million for the 26 weeks ended July 29, 2017, compared to $182.0 million for the 26 weeks ended July 30, 2016. The increase is primarily related to the $170.1 million increase in gross
profit, partially offset by a $89.8 million increase in SG&A expenses and a $17.2 million increase in income tax expense.
20
Liquidity and capital resources
Our primary cash needs are for capital expenditures for new, relocated and remodeled stores, increased merchandise inventories related to store expansion and
new brand additions,
in-store
boutiques (sets of custom designed fixtures configured to prominently display certain prestige brands within our stores), supply chain improvements, share repurchases and for
continued improvement in our information technology systems.
Our primary sources of liquidity are cash on hand, short-term investments and cash flows
from operations, including changes in working capital, and borrowings under our credit facility. The most significant component of our working capital is merchandise inventories reduced by related accounts payable and accrued expenses.
Our working capital needs are greatest from August through November each year as a result of our inventory
build-up
during this period for the approaching holiday season. This is also the time of year when we are at maximum investment levels in our new store class and may not have collected all of the landlord allowances due to us as part of our lease agreements.
Based on past performance and current expectations, we believe that cash on hand, short-term investments, cash generated from operations and available borrowings under our credit facility will satisfy the Companys working capital needs,
capital expenditure needs, commitments, and other liquidity requirements through at least the next 12 months.
The following table presents a summary of
our cash flows for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
26 Weeks Ended
|
|
(In thousands)
|
|
July 29,
2017
|
|
|
July 30,
2016
|
|
Net cash provided by operating activities
|
|
$
|
219,993
|
|
|
$
|
219,630
|
|
Net cash used in investing activities
|
|
|
(343,210
|
)
|
|
|
(129,595
|
)
|
Net cash used in financing activities
|
|
|
(168,933
|
)
|
|
|
(241,791
|
)
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
$
|
(292,150
|
)
|
|
$
|
(151,756
|
)
|
|
|
|
|
|
|
|
|
|
Operating activities
Operating activities consist of net income adjusted for certain
non-cash
items, including depreciation and
amortization,
non-cash
stock-based compensation, realized gains or losses on disposal of property and equipment and the effect of working capital changes.
Merchandise inventories were $1,144.7 million at July 29, 2017, compared to $930.2 million at July 30, 2016, representing an increase of
$214.5 million or 23.1%. Average inventory per store increased 10.5% compared to prior year. The increase in inventory is primarily due to the following:
|
|
|
approximately $106 million due to the addition of 103 net new stores opened since July 30, 2016;
|
|
|
|
approximately $57 million due to the opening of the Dallas, Texas distribution center; and
|
|
|
|
approximately $52 million due to increased sales, new brand additions and incremental inventory for
in-store
prestige brand boutiques.
|
Deferred rent liabilities were $387.7 million at July 29, 2017, an increase of $42.3 million compared to $345.4 million at July 30,
2016. Deferred rent includes deferred construction allowances, future rental increases, free rent and rent holidays, which are all recognized on a straight-line basis over their respective lease term. The increase is primarily due to the addition of
103 net new stores opened since July 30, 2016 and corporate and supply chain expansion.
Investing activities
We have historically used cash primarily for new and remodeled stores, supply chain investments, short-term investments and investments in information
technology systems. Investment activities for capital expenditures were $193.2 million during the 26 weeks ended July 29, 2017, compared to $149.6 million during the 26 weeks ended July 30, 2016. The increase in capital
expenditures is primarily due to our new store program, the expansion of prestige boutiques and related
in-store
merchandising upgrades during the 26 weeks ended July 29, 2017, compared to the 26 weeks
ended July 30, 2016. As of July 29, 2017, we had $180.0 million of short-term investments, which consist of certificates of deposit with maturities of twelve months or less from the date of purchase.
21
Financing activities
Financing activities in fiscal 2017 and 2016 consist principally of capital stock transactions and our stock repurchase program. Purchase of treasury shares in
fiscal 2017 and 2016 represents the fair value of common shares repurchased from plan participants in connection with shares withheld to satisfy minimum statutory tax obligations upon the vesting of restricted stock.
We had no borrowings outstanding under our credit facility as of July 29, 2017, January 28, 2017 and July 30, 2016. The zero outstanding
borrowings position is due to a combination of factors including strong sales growth and overall performance of management initiatives, such as expense control. We may require borrowings under the credit facility from time to time in future periods
to support our new store program, capital expenditures, or seasonal inventory needs.
Share repurchase program
On March 10, 2016, we announced that our Board of Directors authorized a new share repurchase program (the 2016 Share Repurchase Program) pursuant to
which the Company may repurchase up to $425.0 million of the Companys common stock. The 2016 Share Repurchase Program authorization revoked the previously authorized, but unused amounts of $172.4 million from the earlier share
repurchase program. The 2016 Share Repurchase Program did not have an expiration date but provided for suspension or discontinuation at any time.
As part
of the 2016 Share Repurchase Program, we entered into an Accelerated Share Repurchase (ASR) agreement with Goldman, Sachs & Co. to repurchase $200.0 million of the Companys common stock. Under the ASR agreement, the Company paid
$200.0 million to Goldman, Sachs & Co. and received an initial delivery of 851,653 shares in the first quarter of 2016, which were retired and represented 80% of the total shares the Company expected to receive based on the market
price at the time of the initial delivery. In May 2016, the ASR settled and an additional 153,418 shares were delivered to the Company and retired. The final number of shares delivered upon settlement was determined with reference to the average
price of the Companys common stock over the term of the agreement. The transaction was accounted for as an equity transaction. The par value of shares received was recorded as a reduction to common stock with the remainder recorded as a
reduction to additional
paid-in
capital and retained earnings. Upon receipt of the shares, there was an immediate reduction in the weighted average common shares calculation for basic and diluted earnings per
share.
On March 9, 2017, we announced that the Board of Directors authorized a new share repurchase program (the 2017 Share Repurchase Program)
pursuant to which the Company may repurchase up to $425.0 million of the Companys common stock. The 2017 Share Repurchase Program authorization revokes the previously authorized but unused amount of $79.9 million from the 2016 Share
Repurchase Program. The 2017 Share Repurchase Program does not have an expiration date and may be suspended or discontinued at any time.
During the 26
weeks ended July 29, 2017, we purchased 647,088 shares of common stock for $178.1 million. During the 26 weeks ended July 30, 2016, excluding the shares repurchased under the ASR, we purchased 265,481 shares of common stock for
$52.5 million.
Credit facility
In 2011,
we entered into an Amended and Restated Loan and Security Agreement with Wells Fargo Bank, National Association, as Administrative Agent, Collateral Agent and a Lender thereunder, Wells Fargo Capital Finance LLC as a Lender, J.P. Morgan Securities
LLC as a Lender, JP Morgan Chase Bank, N.A. as a Lender and PNC Bank, National Association, as a Lender, which has been amended multiple times since 2011 (as amended, the Loan Agreement). The Loan Agreement currently matures in December 2018,
provides maximum revolving loans equal to the lesser of $200 million or a percentage of eligible owned inventory, contains a $10 million subfacility for letters of credit and allows the Company to increase the revolving facility by an
additional $50 million, subject to consent by each lender and other conditions. The Loan Agreement contains a requirement to maintain a minimum amount of excess borrowing availability at all times. Substantially all of the Companys assets
are pledged as collateral for outstanding borrowings under the facility. Outstanding borrowings will bear interest at the prime rate or London Interbank Offered Rate plus 1.50% and the unused line fee is 0.20%.
See Note 9 to our consolidated financial statements, Subsequent event, for information on the new credit agreement entered into on August 23,
2017.
As of July 29, 2017, January 28, 2017 and July 30, 2016, we had no borrowings outstanding under the credit facility and the Company
was in compliance with all terms and covenants of the Loan Agreement.
22
Off-balance
sheet arrangements
As of July 29, 2017, we have not entered into any
off-balance
sheet arrangements, as described by the
SEC. We do, however, have
off-balance
sheet operating leases and purchase obligations incurred in the ordinary course of business.
Contractual obligations
Our contractual obligations
consist of operating lease obligations, purchase obligations and our revolving line of credit. No material changes outside the ordinary course of business have occurred in our contractual obligations during the 26 weeks ended July 29, 2017.
Critical accounting policies and estimates
Managements discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been
prepared in accordance with U.S. generally accepted accounting principles (GAAP). The preparation of these consolidated financial statements required the use of estimates and judgments that affect the reported amounts of our assets, liabilities,
revenues and expenses. Management bases estimates on historical experience and other assumptions it believes to be reasonable under the circumstances and evaluates these estimates on an ongoing basis. Actual results may differ from these estimates.
There have been no significant changes to the critical accounting policies and estimates included in our Annual Report on Form
10-K
for the fiscal year ended January 28, 2017.
Recent accounting pronouncements not yet adopted
See
Note 2 to our consolidated financial statements, Summary of significant accounting policies Recent accounting pronouncements not yet adopted.
Recently adopted accounting pronouncements
See Note 2 to
our consolidated financial statements, Summary of significant accounting policies Recently adopted accounting pronouncements.