Ulta 2013 Annual Report Download - page 58

Merchandise inventories
Merchandise inventories are stated at the lower of cost or market. Cost is determined using the weighted-average
cost method and includes costs incurred to purchase and distribute goods. Inventory cost also includes vendor
allowances related to co-op advertising, markdowns, and volume discounts. The Company maintains reserves for
lower of cost or market and shrinkage.
Fair value of financial instruments
The carrying value of cash and cash equivalents, accounts receivable, and accounts payable approximates their
estimated fair values due to the short maturities of these instruments. The Company had no outstanding debt as of
February 1, 2014 and February 2, 2013.
Property and equipment
The Company’s property and equipment are stated at cost net of accumulated depreciation and amortization.
Maintenance and repairs are charged to operating expense as incurred. The Company’s assets are depreciated or
amortized using the straight-line method, over the shorter of their estimated useful lives or the expected lease
term as follows:
Equipment and fixtures ................................................... 3to10years
Leasehold improvements ................................................. 10years
Electronic equipment and software ......................................... 3to5years
The Company capitalizes costs incurred during the application development stage in developing or obtaining
internal use software. These costs are amortized over the estimated useful life of the software.
The Company periodically evaluates whether changes have occurred that would require revision of the remaining
useful life of equipment and leasehold improvements or render them not recoverable. If such circumstances arise,
the Company uses an estimate of the undiscounted sum of expected future operating cash flows during their
holding period to determine whether the long-lived assets are impaired. If the aggregate undiscounted cash flows
are less than the carrying amount of the assets, the resulting impairment charges to be recorded are calculated
based on the excess of the carrying value of the assets over the fair value of such assets, with the fair value
determined based on an estimate 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. Customers earn reward certificates to redeem during specific promotional periods
throughout the year. In early fiscal 2014 we converted the remaining The Club at Ulta loyalty customers to
ULTAmate Rewards, a points-based program. ULTAmate Rewards enables customers to earn points based on
their purchases. Points earned are valid for one year and may be redeemed on any product we sell. The Company
accrues the cost of anticipated redemptions related to these programs at the time of the initial purchase based on
historical experience. The accrued liability related to both of the loyalty programs at February 1, 2014 and
February 2, 2013 was $7,740 and $7,084 respectively. The cost of these programs, which was $27,588, $22,044
and $17,200 in fiscal 2013, 2012 and 2011, respectively, is included in cost of sales in the statements of income.
Deferred rent
Many of the Company’s operating leases contain predetermined fixed increases of the minimum rental rate
during the lease. For these leases, the Company recognizes the related rental expense on a straight-line basis over
the expected lease term, including cancelable option periods where failure to exercise such options would result
in an economic penalty, and records the difference between the amounts charged to expense and the rent paid as
deferred rent. The lease term commences on the earlier of the date when the Company becomes legally obligated
for rent payments or the date the Company takes possession of the leased space.
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