Ulta Beauty(ULTA) - 2024 Q3 - Quarterly Report

Part I - Financial Information Financial Statements Ulta Beauty reported $7.65 billion in net sales for the 39 weeks ended Oct 28, 2023, with net income of $896.6 million, reflecting asset growth and debt utilization Consolidated Balance Sheets Total assets reached $5.60 billion as of Oct 28, 2023, driven by inventory growth, with liabilities at $3.57 billion including new short-term debt | Balance Sheet Items (in thousands) | Oct 28, 2023 | Oct 29, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | $121,811 | $250,628 | | Merchandise inventories, net | $2,321,306 | $2,114,669 | | Total current assets | $2,792,040 | $2,745,815 | | Total assets | $5,595,008 | $5,331,549 | | Short-term debt | $195,400 | $0 | | Total liabilities | $3,566,466 | $3,409,294 | | Total stockholders' equity | $2,028,542 | $1,922,255 | Consolidated Statements of Income Q3 2023 net sales rose to $2.49 billion, but net income declined to $249.5 million; 39-week net sales grew to $7.65 billion, with net income at $896.6 million | Income Statement (in thousands) | 13 Weeks Ended Oct 28, 2023 | 13 Weeks Ended Oct 29, 2022 | | :--- | :--- | :--- | | Net sales | $2,488,933 | $2,338,793 | | Gross profit | $992,067 | $962,817 | | Operating income | $327,227 | $361,856 | | Net income | $249,483 | $274,585 | | Diluted EPS | $5.07 | $5.34 | | Income Statement (in thousands) | 39 Weeks Ended Oct 28, 2023 | 39 Weeks Ended Oct 29, 2022 | | :--- | :--- | :--- | | Net sales | $7,653,005 | $6,981,807 | | Gross profit | $3,040,536 | $2,832,007 | | Operating income | $1,160,939 | $1,190,992 | | Net income | $896,636 | $901,657 | | Diluted EPS | $17.99 | $17.35 | Consolidated Statements of Cash Flows Net cash from operations decreased to $358.0 million for the 39 weeks ended Oct 28, 2023, due to inventory growth, while investing and financing cash outflows increased | Cash Flows (in thousands) | 39 Weeks Ended Oct 28, 2023 | 39 Weeks Ended Oct 29, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $358,011 | $573,426 | | Net cash used in investing activities | ($315,900) | ($207,029) | | Net cash used in financing activities | ($658,177) | ($547,329) | | Net decrease in cash and cash equivalents | ($616,066) | ($180,932) | | Cash and cash equivalents at end of period | $121,811 | $250,628 | Notes to Consolidated Financial Statements Notes detail accounting policies, store count (1,374), sales mix shifts (skincare up), $195.4 million credit facility debt, $848.4 million in share repurchases, and a 23.7% effective tax rate - As of October 28, 2023, the Company operated 1,374 retail stores across 50 states[23] | Category (% of Net Sales) | 13 Weeks Ended Oct 28, 2023 | 13 Weeks Ended Oct 29, 2022 | | :--- | :--- | :--- | | Cosmetics | 42% | 44% | | Haircare products and styling tools | 19% | 21% | | Skincare | 19% | 16% | | Fragrance and bath | 13% | 12% | - The company had $195.4 million outstanding under its credit facility as of October 28, 2023, with no borrowings in the prior year[45] - Under the 2022 Share Repurchase Program, the company repurchased 1.82 million shares for $848.4 million in the 39 weeks ended October 28, 2023[57][58] Management's Discussion and Analysis (MD&A) Management discusses Q3 sales growth driven by comparable sales, noting margin declines due to higher costs, and strong liquidity despite increased inventory and share repurchases Overview and Current Trends Ulta Beauty, the largest U.S. specialty beauty retailer, aims to expand market share through strategic priorities, while acknowledging inflation and macroeconomic pressures could impact consumer spending and margins - The company's strategic priorities include: driving growth through an expanded definition of beauty, evolving the omnichannel experience, deepening its community presence, driving operational excellence, cultivating its culture and talent, and expanding its environmental and social impact[65] - The company believes it has gained market share across all categories, as the beauty market expanded in 2022 and into the first 39 weeks of fiscal 2023[70] - Management acknowledges that continued pressure from inflation or other macroeconomic conditions could negatively impact consumer spending, gross margin, and SG&A expenses[71] Results of Operations Q3 2023 net sales increased 6.4% to $2.5 billion, driven by comparable sales, but gross profit margin declined to 39.9% due to lower merchandise margin and higher shrink, impacting operating income - Q3 2023 comparable sales increased 4.5%, driven by a 5.9% increase in transactions and a 1.4% decrease in average ticket[84] - The decrease in Q3 gross profit margin was primarily due to lower merchandise margin, higher inventory shrink, and higher supply chain costs[85] - Q3 SG&A expenses increased as a percentage of sales to 26.6% from 25.5% YoY, driven by higher corporate overhead from strategic investments, store expenses, and marketing[86] - For the 39 weeks ended Oct 28, 2023, comparable sales increased 7.3%, driven by an 8.7% increase in transactions and a 1.4% decrease in average ticket[91] Liquidity and Capital Resources Liquidity is supported by cash from operations, which decreased to $358.0 million due to inventory build, and a credit facility, with $848.4 million in share repurchases and $195.4 million in borrowings | Cash Flow Summary (in thousands) | 39 Weeks Ended Oct 28, 2023 | 39 Weeks Ended Oct 29, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $358,011 | $573,426 | | Net cash used in investing activities | ($315,900) | ($207,029) | | Net cash used in financing activities | ($658,177) | ($547,329) | - The increase in inventory of $206.6 million since October 2022 was driven by support for increased demand ($76 million), new stores ($49 million), a new fulfillment center ($43 million), and new brand launches ($40 million)[106] - Capital expenditures increased to $311.0 million for the 39 weeks ended Oct 28, 2023, up from $204.0 million in the prior year period[107] - The company repurchased 1,821,426 shares for a total cost of $848.4 million during the 39 weeks ended October 28, 2023[113] - The company's credit facility provides for maximum revolving loans of up to $1.0 billion and matures on March 11, 2025; as of October 28, 2023, $195.4 million was outstanding[115][116] Quantitative and Qualitative Disclosures About Market Risk Primary market risk is interest rate exposure on the variable-rate credit facility, with $195.4 million outstanding, where a 1% rate increase would have a minimal $0.04 million impact on interest expense - The company is exposed to interest rate risk through its variable-rate credit facility, which had $195.4 million in borrowings as of October 28, 2023[121] - A hypothetical 1% increase in interest rates would have increased interest expense by approximately $40,000 for the 39 weeks ended October 28, 2023[122] Controls and Procedures CEO and CFO concluded disclosure controls and procedures were effective as of Oct 28, 2023, with no material changes to internal controls during Q3 - The CEO and CFO concluded that as of October 28, 2023, the company's disclosure controls and procedures were effective[124] - No changes occurred during Q3 2023 that materially affected, or are reasonably likely to materially affect, the company's internal controls over financial reporting[125] Part II - Other Information Summary of Part II Items This section confirms no material legal proceedings or changes to risk factors, details Q3 share repurchases of $284.3 million, and notes no defaults or new trading plans by officers - The company states that there have been no material changes from the risk factors previously disclosed in its Annual Report on Form 10-K[128] | Period | Total Shares Purchased | Average Price Paid | Approx. Value Remaining (in thousands) | | :--- | :--- | :--- | :--- | | Jul 30 - Aug 26, 2023 | 157,996 | $445.62 | $471,262 | | Aug 27 - Sep 23, 2023 | 294,931 | $416.89 | $349,768 | | Sep 24 - Oct 28, 2023 | 235,191 | $389.25 | $259,417 | | Q3 2023 Total | 688,118 | $414.04 | $259,417 | - No director or Section 16 officer adopted or terminated a Rule 10b5-1 trading arrangement during the third quarter[130]