Ulta 2011 Annual Report Download

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Welcome to Fabulous.
2011 ANNUAL REPORT

Table of contents

  • Page 1
    2011 ANNUAL REPORT Welcome to Fabulous.

  • Page 2
    ... - 19%* 5 YEAR CAGR - 40%* 5 YEAR CAGR - 18%* Fiscal year ended (1) (In thousands, except per share and per square foot data) January 28, 2012 January 29, 2011 Income statement: Net sales Cost of sales Gross profit Selling, general & administrative expenses Pre-opening expenses Operating income...

  • Page 3
    ... hair straightening treatment and a new nail gel service that provides a longer lasting manicure. We leveraged our powerful loyalty member base with exciting direct marketing, which led to increased customer traffic and contributed to our double digit comparable store sales growth. During the year...

  • Page 4
    ...20% annual square footage growth, with plans to open approximately 100 new stores. This represents approximately 22% square footage growth over 2011. Continue expanding our offering by adding new products, brands, services and categories. We expect to continue to provide our guests with new products...

  • Page 5
    ..., based upon the closing sale price of the common stock on July 30, 2011, as reported on the NASDAQ Global Select Market, was approximately $3,034,284,000. Shares of the registrant's common stock held by each executive officer and director and by each entity or person that, to the registrant...

  • Page 6
    ... Market Risk ...Financial Statements and Supplementary Data ...Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ...Controls and Procedures ...Other Information ...Part III Directors, Executive Officers and Corporate Governance ...Executive Compensation ...Security...

  • Page 7
    ...run frequent promotions and 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. Our stores are predominately located in convenient, high-traffic locations such as power centers...

  • Page 8
    ... success: Differentiated merchandising strategy with broad appeal. We believe our broad selection of merchandise across categories, price points and brands offers a unique shopping experience for our customers. While the products we sell can be found in department stores, specialty stores, salons...

  • Page 9
    ... Pureology in hair care. We also offer haircare services in our full service salons as well as skin and brow services in each of our stores. We plan to continue expanding our portfolio of services in the future by establishing Ulta as a leading salon authority providing high quality and consistent...

  • Page 10
    ... are well positioned to capitalize on the growth of Internet sales of beauty products. We believe our website and retail stores provide our customers with an integrated multi-channel shopping experience and increased flexibility for their beauty buying needs. Improving our operating margin. We plan...

  • Page 11
    ... niche products, the merchandise and retail environment is more fun and provides the ability to shop across product lines and the customer service is better than in other channels. As a result of this market transformation, there are a number of beauty brands pursuing new distribution channels for...

  • Page 12
    ... sales trends and new product launches to keep Ulta's product assortment fresh and relevant to our customers. We believe our broad selection of merchandise, from moderate-priced brands to higher-end prestige brands, offers a unique shopping experience for our customers. The products we sell...

  • Page 13
    ... team. The merchandising team creates a sales forecast by category for the year. Our merchandise planning 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 14
    ... Rewards program in which customers earn purchase-based points, valid for up to one year, which can be redeemed at any time. We have over nine million active loyalty program members. Staffing and operations Retail Our current Ulta store format is staffed with a general manager, a salon manager...

  • Page 15
    ... additional support from time to time from recruiting specialists for the retail and salon operations, regionally based human resource managers, a field loss prevention team, salon technical trainers, management trainers and vendors. Ulta stores are open seven days a week, eleven hours a day, Monday...

  • Page 16
    ... with our internally developed software solutions. Our technology also includes a company-wide network that connects all corporate users, stores, and our distribution infrastructure and provides communications for credit card and daily polling of sales and merchandise movement at the store level. We...

  • Page 17
    ...associates. 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...

  • Page 18
    ..., we may lose market share, which could have a material adverse effect on our business, financial condition, profitability and cash flows. If we are unable to gauge beauty trends and react to changing consumer preferences in a timely manner, our sales will decrease. We believe our success depends in...

  • Page 19
    ... on our business, financial condition, profitability and cash flows. Our continued and future growth largely depends on our ability to successfully open and operate new stores on a profitable basis. During fiscal 2011, we opened 61 new stores. We intend to continue to grow our number of stores for...

  • Page 20
    ...) by exposing potential new customers to the Ulta brand, product offerings, and enhanced content. As the importance of our website and e-commerce operations to our business grows, we are increasingly vulnerable to website downtime and other technical failures. Our failure to successfully respond to...

  • Page 21
    ... sales and leave us with unsold inventory, which could have a material adverse effect on our business, financial condition, profitability and cash flows. As a result of our real estate strategy, most of our stores are located in off-mall shopping areas known as power centers. Power centers typically...

  • Page 22
    ...Ulta branded products and gift-with-purchase and other promotional products, consistent with applicable regulatory requirements, we could suffer lost sales and be required to take costly corrective action, which could have a material adverse effect on our business, financial condition, profitability...

  • Page 23
    ... 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 24
    ... time and money and could prevent us from developing certain aspects of our business operations, which could have a material adverse effect on our business, financial condition, profitability and cash flows. Our technologies, promotional products purchased from third-party vendors, or Ulta products...

  • Page 25
    ... 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 circumstances arise that have a material effect on our cash flow, the anticipated cash needs of our business as well...

  • Page 26
    ... our inventory management; ‰ timing and concentration of new store openings, including additional human resource requirements and related pre-opening and other start-up costs; ‰ cannibalization of existing store sales by new store openings; ‰ levels of pre-opening expenses associated with new...

  • Page 27
    ... announced a special cash dividend on March 8, 2012 that is payable on May 15, 2012, any future dividend payments will be within the discretion of our Board of Directors and will depend on, among other things, our financial condition, results of operations, capital requirements, capital expenditure...

  • Page 28
    ..., high-traffic, locations such as power centers. Our typical store is approximately 10,000 square feet, including approximately 950 square feet dedicated to our full-service salon. Most of our retail store leases provide for a fixed minimum annual rent and generally have a fixed 10-year initial...

  • Page 29
    ... officers, their ages and their positions are shown below: Name Age Position Mine Safety Disclosures Carl S. Rubin ...Gregg R. Bodnar ...Robert S. Guttman ... 52 47 59 President, Chief Executive Officer and Director Chief Financial Officer and Assistant Secretary Senior Vice President, General...

  • Page 30
    ... has traded on the NASDAQ Global Select Market under the symbol "Ulta" since October 25, 2007. Our initial public offering was priced at $18.00 per share. The following table sets forth the high and low sales prices for our common stock on the NASDAQ Global Select Market during fiscal years 2011 and...

  • Page 31
    ... credit facility as well as financial and other conditions existing at the time. Purchases of Equity Securities by the Issuer and Affiliated Purchasers The following table sets forth repurchases of our common stock during the fourth quarter of 2011: Total number of shares purchased (1) Average price...

  • Page 32
    ... graph comparing the cumulative total stockholder return on Ulta's common stock with the NASDAQ Global Select Market Composite Index (NQGS) and the S&P Retail Index (RLX) for the period covering Ulta's first trading day on October 25, 2007 through the end of Ulta's fiscal year ended January 28, 2012...

  • Page 33
    ...of this Annual Report on Form 10-K. Fiscal year ended(1) January 28, January 29, January 30, January 31, February 2, 2012 2011 2010 2009 2008 (In thousands, except per share and per square foot data) Income statement: Net sales ...Cost of sales ...Gross profit ...Selling, general and administrative...

  • Page 34
    ...and experience of a specialty retailer. Key aspects of our beauty superstore strategy include our ability to offer our customers a broad selection of over 20,000 beauty products across the categories of cosmetics, fragrance, haircare, skincare, bath and body products and salon styling tools, as well...

  • Page 35
    ...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 36
    ... expenses; ‰ salon payroll and benefits; ‰ customer loyalty program expense; and ‰ shrink and inventory valuation reserves. 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...

  • Page 37
    ... for the periods indicated: Fiscal year ended January 28, January 29, January 30, 2012 2011 2010 (In thousands, except number of stores) Net sales ...Cost of sales ...Gross profit ...Selling, general and administrative expenses ...Pre-opening expenses ...Operating income ...Interest expense...

  • Page 38
    ... store costs attributed to the impact of significantly higher sales levels in fiscal 2011; and ‰ 70 basis points improvement in merchandise margin due primarily to improved promotional pricing and a shift in category mix towards higher margin product compared with fiscal 2010. Selling, general...

  • Page 39
    ... in fiscal 2009. Gross profit in fiscal 2010 was impacted by: ‰ 120 basis points of leverage in fixed store costs attributed to the impact of significantly higher sales levels in fiscal 2010; ‰ 80 basis points improvement in merchandise margin due to improved promotional pricing and a shift in...

  • Page 40
    ... is merchandise inventories reduced by related accounts payable and accrued expenses. 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...

  • Page 41
    ... and management initiatives focused on leveraging store and supply chain inventories. We had a current tax liability of $4.0 million at the end of fiscal 2011 compared to a prepaid asset of $10.7 million at the end of fiscal 2010. In fiscal 2010, we finalized the tax benefit estimates related to...

  • Page 42
    ... 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 43
    ... of the board of directors. Inventory valuation 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...

  • Page 44
    ... during fiscal 2011. The Company had an interest rate swap agreement with a notional amount of $25 million which was designated as a cash flow hedge. The agreement expired on January 31, 2010. The interest rate swap was recorded at fair value in fiscal 2009 and changes in market value related to...

  • Page 45
    ... 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 28, 2012, our Chief Executive Officer and Chief Financial Officer have...

  • Page 46
    ...be filed within 120 days after our fiscal year ended January 28, 2012 pursuant to Regulation 14A under the Exchange Act in connection with our 2012 annual meeting of stockholders. Item 13. Certain Relationships and Related Transactions, and Director Independence The information required by this item...

  • Page 47
    ...The following documents are filed as a part of this Form 10-K: Report of Independent Registered Public Accounting Firm ...Balance Sheets ...Statements of Income ...Statements of Cash Flows ...Statements of Stockholders' Equity ...Notes to Financial Statements ...Exhibits ...44 46 47 48 49 50 63 The...

  • Page 48
    ..., the financial position of Ulta Salon, Cosmetics & Fragrance, Inc. at January 28, 2012 and January 29, 2011, and the results of its operations and its cash flows for each of the three years in the period ended January 28, 2012, in conformity with U.S. generally accepted accounting principles...

  • Page 49
    ... Independent Registered Public Accounting Firm The Board of Directors and Stockholders Ulta Salon, Cosmetics & Fragrance, Inc. We have audited Ulta Salon, Cosmetics & Fragrance, Inc.'s internal control over financial reporting as of January 28, 2012, based on criteria established in Internal Control...

  • Page 50
    Ulta Salon, Cosmetics & Fragrance, Inc. Balance Sheets (In thousands, except per share data) January 28, 2012 January 29, 2011 Assets Current assets: Cash and cash equivalents ...Receivables, net ...Merchandise inventories, net ...Prepaid expenses and other current assets ...Prepaid income taxes ...

  • Page 51
    Ulta Salon, Cosmetics & Fragrance, Inc. Statements of Income Fiscal year ended January 29, January 30, 2011 2010 (In thousands, except per share data) January 28, 2012 Net sales ...Cost of sales ...Gross profit ...Selling, general and administrative expenses ...Pre-opening expenses ...Operating ...

  • Page 52
    Ulta Salon, Cosmetics & Fragrance, Inc. Statements of Cash Flows January 28, 2012 Fiscal year ended January 29, January 30, 2011 2010 (In thousands) Operating activities Net income ...$ 120,264 $ 71,030 $ Adjustments to reconcile net income to net cash provided by operating activities: ...

  • Page 53
    Ulta Salon, Cosmetics & Fragrance, Inc. Statements of Stockholders' Equity (In thousands) Common Stock Issued Shares Amount Additional Paid-In Capital Treasury Common Stock Treasury Shares Amount Retained Earnings / (Accumulated (Deficit) Accumulated Other Comprehensive Income (Loss) Total ...

  • Page 54
    ... The Company's fiscal years ended January 28, 2012 (fiscal 2011), January 29, 2011 (fiscal 2010) and January 30, 2010 (fiscal 2009) were 52 week years. Use of estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management...

  • Page 55
    ...of discounted future cash flows. Customer loyalty program The Company maintains two customer loyalty programs. The Company's national certificate program provides reward point certificates for free beauty products. Customers earn purchase-based reward points and redeem the related reward certificate...

  • Page 56
    ... stores is recognized at the time of sale, net of estimated returns. The Company provides refunds for product returns within 60 days from the original purchase date. Salon revenue is recognized when services are rendered. Salon service revenue amounted to $98,479, $86,484 and $76,627 for fiscal 2011...

  • Page 57
    Selling, general and administrative expenses Selling, general and administrative expenses includes payroll, bonus, and benefit costs for retail and corporate employees; advertising and marketing costs; occupancy costs related to our corporate office facilities; public company expense including ...

  • Page 58
    ...three to ten years, and store leases generally contain renewal options for additional years. A number of the Company's store leases provide for contingent rentals based upon sales. Contingent rent amounts were insignificant in fiscal 2011, 2010 and 2009. Total rent expense under operating leases was...

  • Page 59
    ...A reconciliation of the federal statutory rate to the Company's effective tax rate is as follows: Fiscal 2011 Fiscal 2010 Fiscal 2009 Federal statutory rate ...State effective rate, net of federal tax benefit ...Other ...Effective tax rate ...55 35.0% 35.0% 35.0% 3.7% 3.7% 3.0% (0.2%) 1.2% 2.3% 38...

  • Page 60
    ...amount of unrecognized tax benefits may change in the next twelve months. However, it does not expect the change to have a significant impact on its financial statements. Income tax-related interest and penalties were insignificant for fiscal 2011, 2010 and 2009. The Company files tax returns in the...

  • Page 61
    ... 29, 2011, the Company had no borrowings outstanding under the new credit facility. 8. Financial instruments The Company is exposed to certain risks relating to its ongoing business operations. The primary risk managed by using derivative instruments is interest rate risk. Interest rate swaps are...

  • Page 62
    ... Plans The Company has had a number of equity incentive plans over the years. The plans were adopted in order to attract and retain the best available personnel for positions of substantial authority and to provide additional incentive to employees, directors, and consultants to promote the success...

  • Page 63
    ... a straight-line basis over the 20 month vesting period. During fiscal 2011 the Company issued restricted stock to certain employees and its board of directors. Employee grants will vest over four years at the rate of 25% per year from the date of grant and director grants will generally cliff vest...

  • Page 64
    ...common share for fiscal years 2011, 2010 and 2009 exclude 621, 1,263 and 3,809 employee options, respectively, due to their anti-dilutive effects. 12. Employee benefit plans The Company provides a 401(k) retirement plan covering all employees who qualify as to age and length of service. The plan is...

  • Page 65
    ...to costs and expenses Balance at end of period Description Deductions Fiscal 2011 Allowance for doubtful accounts ...Shrink reserve ...Inventory - lower of cost or market reserve ...Insurance: Workers Comp / General Liability Prepaid Assset ...Employee Health Care Accrued Liability ...Fiscal 2010...

  • Page 66
    14. Selected quarterly financial data (unaudited) The following tables set forth the Company's unaudited quarterly results of operations for each of the quarters in fiscal 2011 and fiscal 2010. The Company uses a 13 week fiscal quarter ending on the last Saturday of the quarter. 2011 First Second ...

  • Page 67
    ... Equity Incentive Plan Ulta Salon, Cosmetics & Fragrance, Inc. 2007 Incentive Award Plan Ulta Salon, Cosmetics & Fragrance, Inc. Nonqualified Deferred Compensation Plan Office Lease, dated as of April 17, 2007, between Ulta Salon, Cosmetics & Fragrance, Inc. and Bolingbrook Investors, LLC Amendment...

  • Page 68
    ...2000, between Aetna Life Insurance Company c/o UBS Realty Investors, LLC and Ulta Salon, Cosmetics & Fragrance, Inc. Second Amendment to Office/Showroom/ Warehouse Lease, dated as of April 27, 2009, between 1135 Arbor Drive Investors LLC and Ulta Salon, Cosmetics & Fragrance, Inc. Third Amendment to...

  • Page 69
    ... 19, 2011, by and among Ulta Salon, Cosmetics & Fragrance, Inc., Wells Fargo Bank, National Association, Wells Fargo Capital Finance, LLC, J.P. Morgan Securities LLC, JPMorgan Chase Bank, N.A. and PNC Bank, National Association Consent of Independent Registered Public Accounting Firm Certification...

  • Page 70
    ... Exhibit pursuant to Rule 24b-2 under the Securities Exchange Act. Omitted portions have been filed separately with the Securities and Exchange Commission. ** In accordance with Rule 406T of Regulation S-T, the Interactive Data Files in Exhibit 101 to the Annual Report on Form 10-K shall be deemed...

  • Page 71
    ..., on March 28, 2012. 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 below by the following persons on behalf of the...

  • Page 72
    ...reviewed this annual report on Form 10-K of Ulta Salon, Cosmetics & Fragrance, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact... information relating to...accounting...the end of the period covered by this report based...

  • Page 73
    ...reviewed this annual report on Form 10-K of Ulta Salon, Cosmetics & Fragrance, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact... information relating to...accounting... the end of the period covered by this report based...

  • Page 74
    ...DPHQGHGDQGWKDWLQIRUPDWLRQFRQWDLQHGLQWKH5HSRUWIDLUO\SUHVHQWVLQDOOPDWHULDOUHVSHFWVWKHÀQDQFLDOFRQGLWLRQ and results of operations of the Company. $VLJQHGRULJLQDORIWKLVZULWWHQVWDWHPHQWUHTXLUHGE\6HFWLRQKDVEHHQSURYLGHGWRWKH&RPSDQ\DQGZLOOEH UHWDLQHGE\WKH&RPSDQ...

  • Page 75
    ... Bolingbrook, IL 60440 630.410.4627 [email protected] Dennis K. Eck (2†) Non-Executive Chairman of the Board of Directors Independent Registered Public Accounting Firm Ernst & Young LLP Chicago, IL Robert F. DiRomualdo (1) Member of Board of Directors Corporate and Securities Counsel...

  • Page 76
    THE MEN'S SHOP PRESTIGE FRAGRANCES

  • Page 77
    GRAND OPENING DAY SALON STYLI NG TOOLS THE SALON

  • Page 78
    449 STORES 43 STATES 7 2 1 5 1 11 5 15 4 6 4 39 11 3 4 2 37 8 6 17 7 23 7 1 3 3 57 4 9 19 6 14 11 8 18 13 in 1 15 3 6 1 1 31 & GROWING...