Ulta 2008 Annual Report Download

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2008 ANNUAL REPORT

Table of contents

  • Page 1
    2008 ANNUAL REPORT

  • Page 2
    Providing great value and over 21,000 products all under one roof is our business - but our passion is to provide an approachable experience that makes women feel confident and beautiful. We create this world with our commitment to the four "E"s - Escape, Education, Entertainment and Esthetic.

  • Page 3
    ... common shares outstanding: Basic Diluted Other operating data: Comparable store sales increase(3) Number of stores end of year Capital expenditures Depreciation and amortization Consolidated balance sheet data: Cash and cash equivalents Working capital Property and equipment, net Total assets Total...

  • Page 4
    ... year with 311 stores; • Successfully opened our second distribution facility in Phoenix, Arizona on time and on budget in support of our future expansion; • Delivered flat comp store sales and a 1.3% comp store traffic increase through nimble and flexible marketing and merchandising strategies...

  • Page 5
    ... stores. In 2008 our customers embraced new brands such as Dermalogica skincare and Pureology haircare and we anticipate the same enthusiastic response to Benefit Cosmetics, Phyto Hair, and Cargo in 2009. The Company is healthy, has a strong balance sheet and the financial resources to execute our...

  • Page 6
    State Street Store Chicago, IL The experience begins with an escape from the stresses of daily life. It is a welcome and approachable environment where our customer never feels intimidated. A destination where she can immerse herself in a vast world of beauty.

  • Page 7
    ... 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended January 31, 2009 or n Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission File Number: 001-33764 ULTA SALON, COSMETICS & FRAGRANCE, INC. (Exact...

  • Page 8
    ......Item 9B. Other Information ...Item 10. Item 11. Item 12. Item 13. Item 14. Item 15. Part III Directors, Executive Officers and Corporate Governance ...Executive Compensation ...Security Ownership and Certain Beneficial Owners and Management and Related Stockholder Matters ...Certain Relationships...

  • Page 9
    ...frequent promotions and gift coupons for our mass brands, gift-with-purchase offers and multi-product gift sets for our prestige brands, and a comprehensive customer loyalty program. An Off-Mall Location. We are conveniently located in high-traffic, primarily off-mall locations such as power centers...

  • Page 10
    ... stores for prestige products, drug stores and mass merchandisers for mass products, and salons and authorized retail outlets for professional hair care products. When Lyn Kirby, our current President and Chief Executive Officer, joined us in December 1999, we embarked on a multi-year strategy...

  • Page 11
    ... format poised to benefit from shifting channel dynamics. Over the past several years, the approximately $75 billion beauty products and salon services industry has experienced significant changes, including a shift in how manufacturers distribute and customers purchase beauty products. This has...

  • Page 12
    ... data as well as population density relative to maximum drive times, economic and competitive factors. We plan to open stores both in markets in which we currently operate and new markets. 2004 2005 Fiscal Year 2006 2007 2008 Total stores beginning of period ...Stores opened...Stores closed ... 126...

  • Page 13
    ...and nail services. Distribution for beauty products is varied. Prestige products are typically purchased in department or specialty stores, while mass products and staple items are generally purchased at drug stores, food retail stores and mass merchandisers. In addition, salon haircare products are...

  • Page 14
    ...stores for prestige products, drug stores and mass merchandisers for mass products, and salons and authorized retail outlets for professional hair care products. We believe women are increasingly shopping across retail channels as well as purchasing a combination of prestige and mass beauty products...

  • Page 15
    ... over time to match the rising expectations of our customers and to keep pace with our merchandising and operating strategies. In recent years, our strategic focus has been on refining our new store model, improving our real estate selection process and executing on our new store opening program. As...

  • Page 16
    ... of Ulta branded cosmetics, skincare, bath and body products and haircare; and • Other, including candles, home fragrance products, exercise accessories, educational DVDs and other miscellaneous health and beauty products. Organization Our merchandising team reports directly to our CEO and...

  • Page 17
    ... team. The merchandising team creates a sales forecast by category for the year. Our planning and replenishment group creates an open-to-buy plan, approved by senior executives, for each product category. The open-to-buy plan is updated weekly with POS data, receipts and inventory levels and is used...

  • Page 18
    ... reports to our Chief Executive Officer. Each store team receives additional support from time to time from recruiting specialists for the retail and salon operations, a field loss prevention team, market trainers, and management trainers. Ulta stores are open seven days a week, eleven hours a day...

  • Page 19
    ...systems and technologies to maintain and improve our competitive position and to manage the operations of our growing store base. We rely on computer systems to provide information for all areas of our business, including supply chain, merchandising, POS, electronic commerce, finance, accounting and...

  • Page 20
    ... Available Information Our principal website address is www.ulta.com. We make available at this address under investor relations (at http://ir.ulta.com), free of charge, our proxy statement, annual report to shareholders, annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on...

  • Page 21
    ... The markets for beauty products and salon services are highly competitive with few barriers to entry. We compete against a diverse group of retailers, both small and large, including regional and national department stores, specialty retailers, drug stores, mass merchandisers, high-end and discount...

  • Page 22
    ... This execution requires an experienced and talented management team. Ms. Kirby, our President and Chief Executive Officer since December 1999, is of key importance to our business, including her relationships with our vendors and influence on our sales and marketing. If we lost Ms. Kirby's services...

  • Page 23
    ... the distribution operations for Ulta retail stores together with the order fulfillment operations of our e-commerce business. In order to support our recent and expected future growth and to maintain the efficient operation of our business, additional distribution centers may need to be added in...

  • Page 24
    ... our store is located, or a decline in the desirability of the shopping environment of a particular power center or lifestyle center. Such a reduction in customer traffic would reduce our sales and leave us with excess inventory, which could have a material adverse effect on our business, financial...

  • Page 25
    ... be limited, which could have a negative impact on our competitive position. During fiscal 2008, merchandise supplied to Ulta by our top ten vendors accounted for approximately 48% of our net sales. The loss of or a reduction in the amount of merchandise made available to us by any one of these key...

  • Page 26
    ... employment laws. In addition, changes in federal and state minimum wage laws and other laws relating to employee benefits could cause us to incur additional wage and benefits costs, which could hurt our profitability and affect our growth strategy. • Our salon business is subject to state board...

  • Page 27
    ... adverse effect on our business, financial condition and results of operations. Our technologies, promotional products purchased from third-party vendors, or Ulta products or potential products in development may infringe rights under patents, patent applications, trademark, copyright or other...

  • Page 28
    ... condition and results of operations. From time to time we will seek additional equity or debt financing to provide for capital expenditures and working capital consistent with our growth strategy. In addition, if general economic, financial or political conditions in our markets change, or if other...

  • Page 29
    ...costs associated with the defense of this action, the amount of time required to be spent by management and the board of directors on this matter and the ultimate outcome of the litigation could have a material adverse effect on our business, financial condition and results of operations. The market...

  • Page 30
    ...retail sales environment; • changes in our merchandising strategy or mix; • performance of our new and remodeled stores; • the effectiveness of our inventory management; • timing and concentration of new store openings, including additional human resource requirements and related pre-opening...

  • Page 31
    ... include: • dividing our board of directors into three classes serving staggered three-year terms; • authorizing our board of directors to issue preferred stock and additional shares of our common stock without stockholder approval; • prohibiting stockholder actions by written consent...

  • Page 32
    ... feet dedicated to our full-service salon. Most of our retail store leases provide for a fixed minimum annual rent and have a fixed term with options for two or three extension periods of five years each, exercisable at our option. As of January 31, 2009, we operated 311 retail stores in 36 states...

  • Page 33
    ... resource requirements over the next several years. Item 3. Legal Proceedings Securities litigation - In December 2007 and January 2008, three putative securities class action lawsuits were filed against us and certain of our current and then-current executive officers in the United States District...

  • Page 34
    ..., Chief Executive Officer and Director since December 1999. Prior to joining Ulta, Ms. Kirby was President of Circle of Beauty, a subsidiary of Sears, from March 1998 to December 1999; Vice President and General Manager of new business for Gryphon Development, a subsidiary of Limited Brands, Inc...

  • Page 35
    ...NASDAQ Global Select Market Composite Index (NQGS) and the S&P Retail Index (RLX) for the period covering Ulta's initial public offering on October 25, 2007 through the end of Ulta's fiscal year ended January 31, 2009. The graph assumes an investment of $100 made at the closing of trading on October...

  • Page 36
    ...common shares outstanding: Basic ...Diluted ...Other operating data: Comparable store sales increase(3) ...Number of stores end of year ...Total square footage end of year ...Total square footage per store(4) ...Average total square footage(5) ...Net sales per average total square foot(6) ...Capital...

  • Page 37
    ...1990 as a discount beauty retailer at a time when prestige, mass and salon products were sold through separate distribution channels. In 1999 we embarked on a multi-year strategy to understand and embrace what women want in a beauty retailer and transform Ulta into the shopping experience that it is...

  • Page 38
    ...services industry, the shift in distribution of prestige beauty products from department stores to specialty retail stores, coupled with Ulta's competitive strengths, positions us to capture additional market share in the industry through successful execution of our growth strategy. Comparable store...

  • Page 39
    ... retail stores and the time of shipment in the case of Internet sales. Merchandise sales are recorded net of estimated returns. Salon service revenue is recognized at the time the service is provided. Gift card sales revenue is deferred until the customer redeems the gift card. Company coupons and...

  • Page 40
    ... economic conditions and corresponding impact on customer spending levels; • the introduction of new products or brands; • the location of new stores in existing store markets; • competition; • our ability to respond on a timely basis to changes in consumer preferences; • the effectiveness...

  • Page 41
    ...of stores) Net sales...$1,084,646 Cost of sales ...756,712 Gross profit ...Selling, general and administrative expenses ...Pre-opening expenses ...Operating income ...Interest expense ...Income before income taxes ...Income tax expense...Net income ...$ Other operating data: Number of stores end of...

  • Page 42
    ... our new Phoenix distribution center opened in the first quarter fiscal 2008; and • a 20 basis point improvement in freight cost leverage due to an improved transportation network due to the addition of our new Phoenix distribution center and other cost management strategies. Selling, general and...

  • Page 43
    ... total net sales increase. Our comparable store sales growth in fiscal 2007 was driven by a balance in growth of customer traffic and average transaction value. We attribute these results to the continued effectiveness of our marketing strategy, particularly in a difficult holiday season, and double...

  • Page 44
    ...Our working capital position benefits from the fact that we generally collect cash from sales to customers the same day, or within several days of the related sale, while we typically have up to 30 days to pay our vendors. Our working capital needs are greatest from August through November each year...

  • Page 45
    ...the effect of working capital changes. Merchandise inventories were $213.6 million at January 31, 2009, an increase of $37.5 million compared to the prior year end. The increase is primarily related to the addition of 62 net new stores opened during fiscal 2008. Average inventory per store decreased...

  • Page 46
    ...of a second distribution center and the number of new store openings (63 new stores were opened during fiscal 2008, compared to 53 new stores during fiscal 2007 and 31 new stores during fiscal 2006). During fiscal 2006, our Chief Executive Officer exercised stock options in exchange for a promissory...

  • Page 47
    ... our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and selling, general and administrative expenses as a percentage of net sales if the selling prices of our products do...

  • Page 48
    ... Merchandise inventories are carried at the lower of average cost or market value. Cost is determined using the weighted-average cost method and includes costs incurred to purchase and distribute goods as well as related vendor allowances including co-op advertising, markdowns, and volume discounts...

  • Page 49
    ... based on volatilities of a peer group of publicly-traded companies. The risk free interest rate is based on the United States Treasury yield curve in effect on the date of grant for the respective expected life of the option. The expected life represents the time the options granted are expected to...

  • Page 50
    ... that material information relating to the Company is made known to the officers who certify our financial reports and to the members of our senior management and board of directors. Based on management's evaluation as of January 31, 2009, our Chief Executive Officer and Chief Financial Officer have...

  • Page 51
    ... filed within 120 days after our fiscal year ended January 31, 2009 pursuant to Regulation 14A under the Exchange Act in connection with our 2008 annual meeting of stockholders. Item 12. Security Ownership and Certain Beneficial Owners and Management and Related Stockholder Matters The information...

  • Page 52
    Part IV Item 15. Exhibits and Financial Statement Schedules (a) The following documents are filed as a part of this Form 10-K: Reports of Independent Registered Public Accounting Firm ...Consolidated Balance Sheets ...Consolidated Statements of Income ...Consolidated Statements of Cash Flows ......

  • Page 53
    ... ended January 31, 2009, 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), Ulta Salon, Cosmetics & Fragrance, Inc.'s internal control over financial reporting...

  • Page 54
    ... responsibility is to express an opinion on the company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit...

  • Page 55
    ... Balance Sheets (In thousands, except per share data) January 31, 2009 February 2, 2008 Assets Current assets: Cash and cash equivalents ...Receivables, net ...Merchandise inventories, net ...Prepaid expenses and other current assets ...Prepaid income taxes ...Deferred income taxes ...Total current...

  • Page 56
    Ulta Salon, Cosmetics & Fragrance, Inc. Consolidated Statements of Income (In thousands, except per share data) January 31, 2009 Fiscal Year Ended February 2, February 3, 2008 2007 Net sales ...Cost of sales ...Gross profit ...Selling, general and administrative expenses ...Pre-opening expenses ......

  • Page 57
    ...: Receivables ...Merchandise inventories ...Prepaid expenses and other assets ...Income taxes ...Accounts payable ...Accrued liabilities ...Deferred rent ...Net cash provided by operating activities ...Investing activities Purchases of property and equipment ...Receipt of related party notes...

  • Page 58
    Ulta Salon, Cosmetics & Fragrance, Inc. Consolidated Statements of Stockholders' Equity (In thousands, except per share data) Total Preferred Stock Treasury Preferred Stock Par Value Authorized Shares Issued Shares Amount Series I Convertible, Voting, Preferred Stock $.01 17,208 Issued Shares ...

  • Page 59
    ...) - (4,094) Balance - January 28, 2006 ...Issuance of stock ...Purchase of treasury stock ...Accretion of preferred dividends ...Issuance of related party notes receivable ...Unrealized gain on interest rate swap hedge, net of $44 income tax ...Net income for the fiscal year ended February 3, 2007...

  • Page 60
    ...of preferred dividends ...Receipt of related party notes receivable ...Unrealized loss on interest rate swap hedge, net of $478 income tax ...Net income for the fiscal year ended February 2, 2008...Comprehensive income ...Excess tax benefits from stock-based compensation ...Stock compensation charge...

  • Page 61
    ... Loss Total Stockholders' Equity Balance - February 2, 2008 ...Common stock options exercised ...Unrealized gain on interest rate swap hedge, net of $54 income tax...Net income for the fiscal year ended January 31, 2009 ...Comprehensive income ...Excess tax benefits from stock-based compensation...

  • Page 62
    ...9, 1990, to operate specialty retail stores selling cosmetics, fragrance, haircare and skincare products, and related accessories and services. The stores also feature full-service salons. As of January 31, 2009, the Company operated 311 stores in 36 states. All amounts are stated in thousands, with...

  • Page 63
    ... February 2, 2008, respectively. Merchandise inventories Merchandise inventories are stated at the lower of cost or market. Cost is determined using the weightedaverage cost method and includes costs incurred to purchase and distribute goods. Inventory cost also includes vendor allowances related to...

  • Page 64
    ... from merchandise sales at stores is recognized at the time of sale, net of estimated returns. E-commerce sales are recorded upon the shipment of merchandise. Salon revenue is recognized when services are rendered. Revenues from gift cards are deferred and recognized when redeemed. Company coupons...

  • Page 65
    ... 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 carrying amounts of assets and liabilities used for financial reporting purposes and the amounts...

  • Page 66
    Ulta Salon, Cosmetics & Fragrance, Inc. Notes to Consolidated Financial Statements - (Continued) Self-insurance The Company is self-insured for certain losses related to employee health and workers' compensation although stop loss coverage with third-party insurers is maintained to limit the Company...

  • Page 67
    ... for stores that will open in fiscal 2009 and 2010, respectively. Securities litigation - In December 2007 and January 2008, three putative securities class action lawsuits were filed against the Company and certain of its current and then-current executive officers in the United States District...

  • Page 68
    Ulta Salon, Cosmetics & Fragrance, Inc. Notes to Consolidated Financial Statements - (Continued) prior complaints. It adds no new defendants and drops one of the then-current officers as a defendant. On July 21, 2008, Defendants filed a motion to dismiss the Amended Complaint. On September 24, 2008,...

  • Page 69
    ... Company's deferred tax assets and liabilities are as follows: January 31, 2009 February 2, 2008 Deferred tax assets: Reserves not currently deductible . . Employee benefits ...Net operating loss carryforwards ...Accrued liabilities ...Property and equipment ...Inventory valuation ...Total deferred...

  • Page 70
    ...ongoing letter of credit that renews annually in October, the balance of which was $326 as of January 31, 2009 and February 2, 2008. 8. Financial instruments The Company is exposed to certain risks relating to its ongoing business operations. The primary risk managed by using derivative instruments...

  • Page 71
    ...the historical volatility of a peer group of publicly-traded companies. The risk free interest rate is based on the United States Treasury yield curve in effect on the date of grant for the respective expected life of the option. The expected life represents the time the options granted are expected...

  • Page 72
    ... Vanilla Share Options, to develop the expected life. Any dividend the Company might declare in the future would be subject to the applicable provisions of its credit agreement, which currently restricts the Company's ability to pay cash dividends. The Company recognizes compensation cost related to...

  • Page 73
    ... information related to the Company's common stock option activity under the Consultant Plan, which does not apply to fiscal 2008 and 2007: Fiscal 2006 WeightedAverage Exercise Shares Price Options Outstanding Beginning of year ...Exercised ...Canceled...End of year...Exercisable at end of year...

  • Page 74
    ... share for fiscal years 2008, 2007 and 2006 exclude 3,758, 1,136 and 932 employee options, respectively, due to their anti-dilutive effects. 11. Employee benefit plans The Company provides a 401(k) retirement plan covering all employees who qualify as to age, length of service, and hours employed...

  • Page 75
    Ulta Salon, Cosmetics & Fragrance, Inc. Notes to Consolidated Financial Statements - (Continued) 13. Valuation and qualifying accounts Description Balance at Beginning of Period Charged to Costs and Expenses Deductions Balance at end of Period Fiscal 2008 Allowance for doubtful accounts ...Shrink ...

  • Page 76
    ... set forth the Company's unaudited quarterly results of operations for each of the quarters in fiscal 2008 and fiscal 2007. The Company uses a 13 week fiscal quarter ending on the last Saturday of the quarter. Fiscal Quarter 2008 First Second Third Fourth First Second 2007 Third Fourth Net sales...

  • Page 77
    ... Salon, Cosmetics & Fragrance, Inc. and Lyn Kirby Ulta Salon, Cosmetics & Fragrance, Inc. Nonqualified Deferred Compensation Plan Consent of Independent Registered Public Accounting Firm Certification of the Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange...

  • Page 78
    ... of Chicago, State of Illinois, on April 2, 2009. ULTA SALON, COSMETICS & FRAGRANCE, INC. By: /s/ Gregg R. Bodnar Gregg R. Bodnar Chief Financial Officer and Assistant Secretary Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons...

  • Page 79
    Our collection of products is presented with class, inviting the guest to test, play and discover. We're staffed with a knowledgeable team who educate and advise our customers on the latest trends, technologies and much more. State Street Store Chicago, IL

  • Page 80
    State Street Store Chicago, IL

  • Page 81
    With over 3,900 testers to sample, professional makeovers and live demonstrations, every visit is an opportunity for discovery, surprise and delight. It is truly a candy store for women.

  • Page 82
    State Street Store Chicago, IL Our store and salon design feature sleek, modern lines that reinforce our status as a fashion authority. Wide aisles and clear sight lines create a fresh, inviting shopping experience.

  • Page 83
    ... of Board of Directors Yves Sisteron (3) Member of Board of Directors The Company has filed with the Securities and Exchange Commission, as Exhibit 31 to its Annual Report on Form 10-K for fiscal year 2008, the Chief Executive Officer and Chief Financial Officer certifications as required by...

  • Page 84
    the store on everyone's lips 311 stores in 36 states and growing