Ulta 2013 Annual Report Download

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20
13
ANNUAL REPORT

Table of contents

  • Page 1
    20 13 ANNUAL REPORT

  • Page 2
    ...comparable store sales unless the store was closed for a portion of the current or comparable prior year. (4) Net sales per average total square foot was calculated by dividing net sales for the year by the average square footage for those stores open during each year. The sales for the 53rd week of...

  • Page 3
    ...: "21 Days of Beauty," "Love Your Skin," "Love Your Hair"), special events in stores showcasing new products and services, increased digital marketing and a stronger focus on social media. Our marketing team is leading our efforts to drive greater awareness and clarity about the ULTA Beauty brand...

  • Page 4
    ... our supply chain and omni-channel capabilities, enhancing our loyalty program, increasing training for store and salon associates to improve the customer experience, and developing marketing strategies to increase awareness of the ULTA Beauty brand and drive new customer acquisition. ULTA Beauty is...

  • Page 5
    ..., based upon the closing sale price of the common stock on August 3, 2013, as reported on the NASDAQ Global Select Market, was approximately $4,815,407,000. 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
    ... Directors, Executive Officers and Corporate Governance ...Executive Compensation ...Security Ownership and Certain Beneficial Owners and Management and Related Stockholder Matters ...Certain Relationships and Related Transactions, and Director Independence ...Principal Accountant Fees and Services...

  • Page 7
    ... on our business and financial performance; the possibility that new store openings and existing locations may be impacted by developer or co-tenant issues; the possibility that the capacity of our distribution and order fulfillment infrastructure may not be adequate to support our recent growth and...

  • Page 8
    ... three beauty categories of prestige, mass and salon and which have taken years to develop, creates a significant impediment for other retailers to replicate our model. We work closely with our vendors to market both new and existing brands in a collaborative manner. Experienced management team. We...

  • Page 9
    ...to our stores and website. We continue to aggressively develop and add new website features and functionality, marketing programs, product assortment, new brands and multi-channel integration points. We intend to establish ourselves as a leading online beauty resource by providing our customers with...

  • Page 10
    ..., 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. We opened 127 (125 net of closings) stores in fiscal 2013 and the average investment required to open a new Ulta store...

  • Page 11
    ... 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. Many of the products we sell...

  • Page 12
    ... merchandise planning group creates an open-to-buy plan, approved by senior executives, for each product category. The opento-buy plan is updated weekly with point-of-sale (POS) data, receipts and inventory levels and is used throughout the year to balance buying opportunities and inventory return...

  • Page 13
    ... sites, social media, display advertising, and other digital marketing channels. Ulta's email marketing programs are effective in communicating with online and retail customers and driving sales. Staffing and operations Retail Our current Ulta store format is staffed with a general manager, a salon...

  • Page 14
    ... case when only one or two of a particular product is required. Our distribution facilities use warehouse management and warehouse control software systems to maintain and support product purchase decisions. Store replenishment order selection is performed using pick-to-light processing technologies...

  • Page 15
    ... employees. 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 16
    ... our business, financial condition, profitability, and cash flows. Our results of operations may be materially affected by conditions in the global capital markets and the economy generally, both in the U.S. and internationally. Concerns over inflation, employment, tax laws, energy costs, healthcare...

  • Page 17
    number of significant real estate developers or shopping center landlords could have a material adverse effect on our business, financial condition, profitability, and cash flows. We may be unable to compete effectively in our highly competitive markets. The markets for beauty products and salon ...

  • Page 18
    ... and financial plan and successfully open and operate new stores on a profitable basis. Our senior management is currently evaluating our long-range strategic and financial plan to align and prioritize our growth strategies, as well as additional investments that will be needed to support continued...

  • Page 19
    ... center expected to open in 2015, and system improvements to support expanded omni-channel capabilities. Our failure to effectively upgrade and expand our distribution capacity on a timely basis to keep pace with our anticipated growth in stores could have a material adverse effect on our business...

  • Page 20
    ... product offerings online and through our stores, and of opening up our channels to increased internet competition could have a material adverse impact on our business, financial condition, profitability and cash flows, including future growth. Increased costs or interruption in our third-party...

  • Page 21
    ...relationships with vendors to purchase prestige, mass and salon beauty products on reasonable terms. If these relationships were to be impaired, or if certain vendors were to change their distribution model or are unable to supply sufficient merchandise to keep pace with our growth plans, we may not...

  • Page 22
    ..., which could have a negative impact on our competitive position. During fiscal 2013, merchandise supplied to Ulta by our top ten vendors accounted for approximately 51% of our net sales. There continues to be vendor consolidation within the beauty products industry. The loss of or a reduction in...

  • Page 23
    ... 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 regulations and state licensing requirements for our...

  • Page 24
    ... costs and/or delays in store openings could increase our store opening costs, cause us to incur lost sales and profits, and damage our public reputation and could have a material adverse effect on our business, financial condition, profitability and cash flows. Our Ulta products and salon services...

  • Page 25
    ...in paper or printing costs could have a material adverse effect on our business, financial condition, profitability and cash flows. Our secured revolving credit facility contains certain restrictive covenants that could limit our operational flexibility, including our ability to open stores. We have...

  • Page 26
    ... execute our growth strategy as planned and our results of operations may suffer. Failure to maintain adequate financial and management processes and controls could lead to errors in our financial reporting and could harm our ability to manage our expenses. Reporting obligations as a public company...

  • Page 27
    ... increase in the use of social media platforms, including blogs, social media websites, and other forms of internet-based communications, which allow individuals access to a broad audience of consumers and other interested persons. Negative commentary regarding us or the products we sell may be...

  • Page 28
    ... losses. From time to time we may be subject to litigation claims through the ordinary course of our business operations regarding, but not limited to, employment matters, security of consumer and employee personal information, contractual relations with suppliers, marketing and infringement of...

  • Page 29
    ...retail stores, corporate offices and distribution and warehouse facilities are leased or subleased. Our retail stores are predominantly located in convenient, high-traffic, locations such as power centers. Our typical store is approximately 10,000 square feet, including approximately 950 square feet...

  • Page 30
    ... to support expanded omni-channel capabilities. Our principal executive office is in Bolingbrook, Illinois. The lease for the Bolingbrook office expires on August 31, 2018. In 2013 the Company expanded its office space with an additional 42,000 square feet located at its current headquarters. This...

  • Page 31
    ... November 2012. Prior to joining Ulta Beauty, he was the Chief Marketing & Services Officer for Best Buy Europe since June 2010. Prior to his role with Best Buy Europe, he held numerous other senior marketing and management roles with Best Buy USA since 2001. Before that time, Mr. Severts served as...

  • Page 32
    ... 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 2013 and...

  • Page 33
    ...The following table provides information about Ulta common stock that may be issued under our equity compensation plans as of February 1, 2014. Number of securities to be issued upon exercise of outstanding options, warrants and rights Weighted-average exercise price of outstanding options, warrants...

  • Page 34
    ... 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 January 30, 2009 through the end of Ulta's fiscal year ended February 1, 2014. The graph assumes an investment of $100 made at the closing of trading...

  • Page 35
    ... Data," of this Annual Report on Form 10-K. Fiscal year ended(1) February 1, February 2, January 28, January 29, January 30, 2014 2013 2012 2011 2010 (In thousands, except per share and per square foot data) Income statement: Net sales(2) ...Cost of sales ...Gross profit ...Selling, general and...

  • Page 36
    ... on our business and financial performance; the possibility that new store openings and existing locations may be impacted by developer or co-tenant issues; the possibility that the capacity of our distribution and order fulfillment infrastructure may not be adequate to support our recent growth and...

  • Page 37
    ... on our ability to execute our five point growth strategy, including growing stores to approximately 1,200 locations, expanding our offering by adding new products, brands and services, enhancing our loyalty program, broadening our marketing reach and expanding our digital business. We believe that...

  • Page 38
    ... estate taxes, utilities, repairs and maintenance, insurance, licenses, and cleaning 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...

  • Page 39
    ...1, 2014 Fiscal year ended February 2, 2013 January 28, 2012 (Dollars in thousands) Net sales ...Cost of sales ...Gross profit ...Selling, general and administrative expenses ...Pre-opening expenses ...Operating income ...Interest (income) expense ...Income before income taxes ...Income tax expense...

  • Page 40
    ... merchandise margins due mainly to changes in marketing and merchandising strategies; offset by ‰ 20 basis point leverage in supply chain due to operating efficiencies; and ‰ 10 basis points of leverage in fixed store costs attributed to the impact of higher sales levels in fiscal 2013. Selling...

  • Page 41
    ...contributed $153.1 million of the total net sales increase. We attribute the increase in comparable store sales to our successful marketing and merchandise strategies. The sales for the 53rd week of fiscal 2012 were approximately $55 million. Gross profit Gross profit increased $166.9 million, or 27...

  • Page 42
    ...income tax expense. 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, supply chain improvements and for continued improvement in our information technology systems...

  • Page 43
    ... million. Capital expenditures for fiscal 2013, 2012 and 2011 and planned fiscal 2014 by major category are as follows: (in millions) 2014 Budget Fiscal 2013 Fiscal 2012 Fiscal 2011 New, Remodeled, Relocated Stores ...Merchandising ...Information Systems ...Supply Chain ...Store Maintenance & Other...

  • Page 44
    ... sales growth, overall performance of management initiatives including expense control as well as inventory and other working capital reductions. We may require borrowings under the facility from time to time in future periods to support our new store program and seasonal inventory needs. Dividend...

  • Page 45
    ... 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 46
    ... 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 47
    ... 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 February 1, 2014, our Chief Executive Officer and Chief Financial Officer have...

  • Page 48
    ...within 120 days after our fiscal year ended February 1, 2014 pursuant to Regulation 14A under the Exchange Act in connection with our 2014 annual meeting of stockholders. Item 12. Security Ownership and Certain Beneficial Owners and Management and Related Stockholder Matters The information required...

  • Page 49
    ... Accountant Fees and Services The information required by this item is incorporated by reference to our definitive proxy statement to be filed within 120 days after our fiscal year ended February 1, 2014 pursuant to Regulation 14A under the Exchange Act in connection with our 2014 annual meeting...

  • Page 50
    Part IV Item 15. Exhibits and Financial Statement Schedules (a) The following documents are filed as a part of this Form 10-K: Report of Independent Registered Public Accounting Firm ...Consolidated Balance Sheets ...Consolidated Statements of Income ...Consolidated Statements of Cash Flows ......

  • Page 51
    ... financial position of Ulta Salon, Cosmetics & Fragrance, Inc. at February 1, 2014 and February 2, 2013, and the consolidated results of its operations and its cash flows for each of the three years in the period ended February 1, 2014, in conformity with U.S. generally accepted accounting...

  • Page 52
    ...Management's Annual Report on Internal Control over Financial Reporting. Our 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...

  • Page 53
    Ulta Salon, Cosmetics & Fragrance, Inc. Consolidated Balance Sheets (In thousands, except per share data) February 1, 2014 February 2, 2013 Assets Current assets: Cash and cash equivalents ...Receivables, net ...Merchandise inventories, net ...Prepaid expenses and other current assets ...Deferred ...

  • Page 54
    Ulta Salon, Cosmetics & Fragrance, Inc. Consolidated Statements of Income Fiscal year ended February 2, January 28, 2013 2012 (In thousands, except per share data) February 1, 2014 Net sales ...Cost of sales ...Gross profit ...Selling, general and administrative expenses ...Pre-opening expenses ...

  • Page 55
    Ulta Salon, Cosmetics & Fragrance, Inc. Consolidated Statements of Cash Flows Fiscal year ended February 2, January 28, 2013 2012 (In thousands) February 1, 2014 Operating activities Net income ...$ 202,849 $ 172,549 $ 120,264 Adjustments to reconcile net income to net cash provided by operating ...

  • Page 56
    ...) Common Stock Issued Shares Amount Additional Paid-In Capital Treasury Common Stock Treasury Shares Amount Retained Earnings Total Stockholders' Equity Balance - January 29, 2011 ...Stock options exercised ...Purchase of treasury shares ...Net income ...Excess tax benefits from stock-based...

  • Page 57
    ... specialty retail stores selling cosmetics, fragrance, haircare and skincare products, and related accessories and services. The stores also feature full-service salons. As of February 1, 2014, the Company operated 675 stores in 46 states. As used in these notes and throughout this Annual Report...

  • Page 58
    ... of discounted future cash flows. Customer loyalty program During fiscal 2013, the Company operated two loyalty programs, ULTAmate Rewards and The Club at Ulta. The Club at Ulta is a certificate program offering customers reward certificates for free beauty products based on their level of purchases...

  • Page 59
    ... 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 $145,815, $121,357 and $98,479 for fiscal 2013, 2012 and 2011, respectively. Company coupons...

  • Page 60
    ...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 Sarbanes-Oxley...

  • Page 61
    ... 483,059 The Company had no capitalized interest for fiscal 2013 and 2012 as a result of not utilizing the credit facility during the year. 4. Commitments and contingencies Leases - The Company leases retail stores, distribution and office facilities, and certain equipment. Original non-cancelable...

  • Page 62
    ... of the following: (In thousands) February 1, 2014 February 2, 2013 Accrued vendor liabilities (including accrued property and equipment costs) ...Accrued customer liabilities ...Accrued payroll, bonus and employee benefits ...Accrued taxes, other ...Other accrued liabilities ...Accrued liabilities...

  • Page 63
    ... is the Company's best estimate of the potential liability for uncertain tax positions. The increase in the liability for income taxes associated with uncertain tax positions relates to a current year position. There was no reserve for uncertain tax positions at February 2, 2013. A reconciliation of...

  • Page 64
    ... 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 of the Company's business...

  • Page 65
    ... model using the following weighted-average assumptions: Fiscal 2013 Fiscal 2012 Fiscal 2011 Volatility rate ...Average risk-free interest rate ...Average expected life (in years) ...Dividend yield ... 49.2% 53.5% 54.0% 0.9% 1.2% 1.5% 4.4 6.3 6.3 None None None During fiscal 2013 the Company...

  • Page 66
    ... last reported sale price of our common stock on the NASDAQ Global Select Market on February 1, 2014 was $85.71 per share. Restricted stock awards The Company issues restricted stock to certain employees and its Board of Directors. Employee grants will generally cliff vest after 3 years and director...

  • Page 67
    ...per common share for fiscal years 2013, 2012 and 2011 exclude 658, 533 and 621 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 and length of service. The plan is...

  • Page 68
    ... thousands) Balance at end of period Description Fiscal 2013 Allowance for doubtful accounts ...Shrink reserve ...Inventory - lower of cost or market reserve ...Insurance: Workers Comp / General Liability Prepaid Asset ...Employee Health Care Accrued Liability ...Fiscal 2012 Allowance for doubtful...

  • Page 69
    ...'s unaudited quarterly results of operations for each of the quarters in fiscal 2013 and fiscal 2012. The Company uses a 13 week (14 week in fourth quarter fiscal 2012) fiscal quarter ending on the last Saturday of the quarter. 2013 First (In thousands, except per share data) Second Third Fourth...

  • Page 70
    ...dated June 20, 2013 between Ulta Salon, Cosmetics & Fragrance, Inc. and Mary N. Dillon Amended and Restated Loan and Security Agreement, dated October 19, 2011, by and among Ulta Salon, Cosmetics & Fragrance, Inc., Wells Fargo Bank, National Association, Wells Fargo Capital Finance, LLC, J.P. Morgan...

  • Page 71
    ... 6, 2013, 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 Form of Retention and Severance Agreement Code of Business Conduct...

  • Page 72
    ... of document Filed Herewith Form Exhibit Number Incorporated by Reference File Filing Number Date 101.SCH 101.CAL 101.LAB 101.PRE 101.DEF XBRL Taxonomy Extension Schema XBRL Taxonomy Extension Calculation XBRL Taxonomy Extension Labels XBRL Taxonomy Extension Presentation XBRL Taxonomy...

  • Page 73
    ..., on April 2, 2014. ULTA SALON, COSMETICS & FRAGRANCE, INC. By: /s/ Scott M. Settersten Scott M. Settersten 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 74
    ..., process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. By: /s/ Mary N. Dillon Mary N. Dillon Chief Executive Officer and...

  • Page 75
    ... internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the Audit committee of the registrant's Board of Directors (or persons...

  • Page 76
    ...-Oxley Act of 2002), I, the undersigned Chief Executive Officer and Director of Ulta Salon, Cosmetics & Fragrance Inc. (the "Company"), hereby certify that the Annual Report on Form 10-K of the Company for the fiscal year ended February 1, 2014 (the "Report"), fully complies with the requirements of...

  • Page 77
    ... Chief Executive Officer Company Headquarters ULTA Salon, Cosmetics & Fragrance, Inc. 1000 Remington Boulevard, Suite 120 Bolingbrook, IL 60440 (630) 410-4800 www.ulta.com Scott M. Settersten Chief Financial Officer Robert S. Guttman Senior Vice President, General Counsel & Secretary Annual...

  • Page 78
    CLINIQUE THE MEN'S SHOP PHILOSOPHY THE SALON BENEFIT BAREMINERALS SALON STYLING TOOLS

  • Page 79
    LANCÃ"ME WITH A COMPREHENSIVE ASSORTMENT OF MORE THAN 20,000 BEAUTY PRODUCTS, ULTA OFFERS A UNIQUE SHOPPING EXPERIENCE.

  • Page 80