Ulta 2014 Annual Report Download

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2014
ANNUAL REPORT
432
OFCOBC

Table of contents

  • Page 1
    2014 ANNUAL REPORT

  • Page 2
    ... shares outstanding: Basic Diluted Dividends declared per common share Other Operating Data: Comparable sales increase(3) Retail and salon comparable sales E-commerce comparable sales Total comparable sales increase Number of stores end of year Net sales per average total square foot(4) Capital...

  • Page 3
    ... brand positioning, guest experience, product and services portfolio, and store and e-commerce expansion plans. We also projected the IT and supply chain requirements to achieve our strategy, then established a five year plan designed to deliver sustainable growth and attractive shareholder returns...

  • Page 4
    ...quarter of 2015. We are also planning to open another distribution center in Dallas in 2016. Successfully executing our multi-year supply chain project is a top priority across the organization. Invest in infrastructure to support our guest experience and growth, and capture scale efficiencies฀To...

  • Page 5
    ..., based upon the closing sale price of the common stock on August 2, 2014, as reported on the NASDAQ Global Select Market, was approximately $4,117,508,000. 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
    ...Accounting and Financial Disclosure ...Item 9A. Controls and Procedures ...Item 9B. Other Information ...Part III Item 10. Directors, Executive Officers and Corporate Governance ...Item 11. Executive Compensation ...Item 12. Security Ownership and Certain Beneficial Owners and Management and Related...

  • Page 7
    ...our product categories drives customer loyalty. We offer a comprehensive customer loyalty program, ULTAmate Rewards and targeted promotions through our Customer Relationship Management platform (CRM). We also offer frequent promotions and coupons, in-store events and gifts with purchase. Business 3

  • Page 8
    ... customer base. Approximately fifteen million Ulta guests are members of our loyalty program. We use this valuable proprietary database to drive traffic, better understand our guests' purchasing patterns and support new store site selection. We regularly employ a broad range of media, including...

  • Page 9
    ... our private label business, which in the future could include partnerships or acquisitions to create more exclusive brands for Ulta. Finally, we plan to increase the brands and categories we offer on Ulta.com. Deliver exceptional services in three core areas: hair, skin health and brows. The salon...

  • Page 10
    ... develop and add new website features and functionality, marketing programs, product assortment, new brands and omni-channel integration points. We intend to establish ourselves as a leading online beauty resource by providing our customers with a rich online experience for information on key trends...

  • Page 11
    ... of two new distribution centers which we expect to open in 2015 and 2016. Merchandising Strategy We focus on offering one of the most extensive product and brand selections in our industry, including a broad assortment of branded and private label beauty products in cosmetics, fragrance, haircare...

  • Page 12
    ... may expand our private label products into additional categories. Ulta brand products represented approximately 4% of total Company sales in fiscal 2014. We also offer products such as CK One cosmetics, Japonesque cosmetics, Ultra CHI hair care appliances and IT Cosmetics brushes that are exclusive...

  • Page 13
    ... coupons 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...

  • Page 14
    ...-year supply chain project beginning in 2014. This includes adding additional capacity, with a fourth distribution center expected to open in 2015 in Greenwood, Indiana, a fifth distribution center expected to open in 2016 in Dallas, Texas and system improvements to support expanded omni-channel...

  • Page 15
    ... credit card and daily polling of sales and merchandise movement at the store level. We intend to leverage our technology infrastructure and systems where appropriate to gain operational efficiencies through more effective use of our systems, people and processes. We update the technology supporting...

  • Page 16
    ...'s Day. 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 17
    .... The health of the economy in the channels we serve may affect consumer purchases of discretionary items such as beauty products and salon services, which could have a material adverse effect on our business, financial condition, profitability and cash flows. In addition, the recent global economic...

  • Page 18
    ... 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 19
    ... business, financial condition, profitability and cash flows. Our business requires disciplined execution at all levels of our organization. This execution requires an experienced and talented management team. Mary Dillon was appointed Chief Executive Officer and a member of the Board of Directors...

  • Page 20
    ...and other related operational systems. Although we believe that our participation in both e-commerce and physical store sales is a distinct advantage for us due to synergies and the potential for new customers, supporting product offerings through both of these channels could create issues that have...

  • Page 21
    ...increasingly important to our business. The Ulta.com website serves as an effective extension of Ulta's marketing and prospecting strategies (beyond catalogs, newspaper inserts and national advertising) by exposing potential new customers to the Ulta brand, product offerings and enhanced content. As...

  • Page 22
    ... other distribution channels for such products, therefore widening the availability of these products in other retail channels, which could negatively impact the revenue we earn from the sale of such products. We rely on our good relationships with vendors to purchase prestige, mass and salon beauty...

  • Page 23
    ... in the future. These events could interrupt the marketing and sale of our Ulta products, severely damage our brand reputation and image in the marketplace, increase the cost of our products, cause us to fail to meet customer expectations or cause us to be unable to deliver merchandise in sufficient...

  • Page 24
    ... 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 25
    ... 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 26
    ... future paper costs are subject to supply and demand forces that we cannot control. Future additional increases in postal rates or 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...

  • Page 27
    ..., other retailers and vendors concerning, among other things, their performance, strategy or accounting practices could cause the market price of our common stock to decline regardless of our actual operating performance. Use of social media may adversely impact our reputation or subject us to fines...

  • 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
    ... our common stock to decline. The timing and actual number of shares repurchased under any such stock repurchase program depends on a variety of factors including the timing of open trading windows, price, corporate and regulatory requirements and other market conditions. Repurchases pursuant to any...

  • Page 30
    ... convenient, 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 10-year initial...

  • Page 31
    ... to open in 2015 and 2016, and system improvements to support expanded omni-channel capabilities. In April 2014, we entered into a lease for a distribution center located in Greenwood, Indiana. The Greenwood warehouse contains approximately 671,000 square feet and is expected to open in fiscal 2015...

  • Page 32
    ...Merchandising and Marketing Officer effective March 27, 2015. Name Age Position Mary N. Dillon ...Scott M. Settersten ...Jeffrey J. Childs ...Robert S. Guttman ...David Kimbell ...Janet Taake ... 53 54 57 62 48 57 Chief Executive Officer and member of the Board of Directors Chief Financial Officer...

  • Page 33
    ... 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 2014 and 2013: Fiscal Year 2014 High Low...

  • Page 34
    ... million to the 2014 Share Repurchase Program effective March 17, 2015. Recent sales of unregistered securities None. Securities authorized for issuance under equity compensation plans The following table provides information about Ulta common stock that may be issued under our equity compensation...

  • Page 35
    .... Set forth below is a 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 January 29, 2010 through the end of Ulta's fiscal year ended January 31, 2015. The...

  • Page 36
    ... Data," of this Annual Report on Form 10-K. Fiscal year ended(1) January 31, February 1, February 2, January 28, January 29, 2015 2014 2013 2012 2011 (In thousands, except per share and per square foot data) Income statement: Net sales(2) ...Cost of sales ...Gross profit ...Selling, general and...

  • Page 37
    ...day of the 14th month of operation. Remodeled stores are included in comparable sales unless the store was closed for a portion of the current or comparable prior year. (4) Total square footage per store is calculated by dividing total square footage at end of year by number of stores at end of year...

  • Page 38
    ... services industry, the shift in distribution channel 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. Comparable sales is a key metric that is monitored closely...

  • Page 39
    ... time the service is provided. Gift card sales revenue is deferred until the customer redeems the gift card. Company coupons and other incentives are recorded as a reduction of net sales. Comparable sales reflect sales for stores beginning on the first day of the 14th month of operation. Therefore...

  • Page 40
    ... 31, 2015 Fiscal year ended February 1, 2014 February 2, 2013 (Dollars in thousands) Net sales ...Cost of sales ...Gross profit ...Selling, general and administrative expenses ...Pre-opening expenses ...Operating income ...Interest (income) expense, net ...Income before income taxes ...Income tax...

  • Page 41
    ... decrease in gross profit margin in fiscal 2014 was primarily due to 10 basis points of deleverage in merchandise margins driven primarily by product and channel mix shifts and converting the remaining 50% of our loyalty program members to the ULTAmate rewards loyalty program. Selling, general and...

  • Page 42
    ... in 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...

  • Page 43
    ... increased merchandise inventories related to store expansion, supply chain improvements, share repurchases and for continued improvement in our information technology systems. Our primary sources of liquidity are cash on hand and cash flows from operations, including changes in working capital, and...

  • Page 44
    ...of 99 net new stores opened since February 1, 2014. Investing activities We have historically used cash primarily for new and remodeled stores, supply chain investments, short-term investments and investments in information technology systems. Investment activities for capital expenditures were $249...

  • Page 45
    ...a multi-year supply chain project which will include adding additional capacity, including a fourth distribution center expected to open in 2015, a fifth distribution center expected to open in 2016 and system improvements to support expanded omni-channel capabilities. The 2015 merchandising capital...

  • Page 46
    ... 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 47
    ... with the Audit Committee 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 43

  • Page 48
    ...We maintain a customer loyalty program, ULTAmate Rewards, in which program members earn points based on purchases. Points earned by members are valid for at least one year and may be redeemed on any product we sell. We accrue the cost of anticipated redemptions related to this program at the time of...

  • Page 49
    ... and related valuation model assumptions. Recent accounting pronouncements In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers, issued as a new Topic, Accounting Standards Codification Topic 606. The new revenue...

  • 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, 2015, our Chief Executive Officer and Chief Financial Officer have...

  • Page 51
    ...be filed within 120 days after our fiscal year ended January 31, 2015 pursuant to Regulation 14A under the Exchange Act in connection with our 2015 annual meeting of stockholders. Item 13. Certain Relationships and Related Transactions, and Director Independence The information required by this item...

  • 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: Report of Independent Registered Public Accounting Firm ...Consolidated Balance Sheets ...Consolidated Statements of Income ...Consolidated Statements of Cash Flows ......

  • Page 53
    Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders Ulta Salon, Cosmetics & Fragrance, Inc. We have audited the accompanying consolidated balance sheets of Ulta Salon, Cosmetics & Fragrance, Inc. as of January 31, 2015 and February 1, 2014, and the related...

  • Page 54
    ...the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Ulta Salon, Cosmetics & Fragrance, Inc. as of January 31, 2015 and February 1, 2014, and the related consolidated statements of income, cash flows and stockholders' equity for each of the three years in...

  • Page 55
    Ulta Salon, Cosmetics & Fragrance, Inc. Consolidated Balance Sheets (In thousands, except per share data) January 31, 2015 February 1, 2014 Assets Current assets: Cash and cash equivalents ...Short-term investments ...Receivables, net ...Merchandise inventories, net ...Prepaid expenses and other ...

  • Page 56
    Ulta Salon, Cosmetics & Fragrance, Inc. Consolidated Statements of Income Fiscal year ended February 1, February 2, 2014 2013 (In thousands, except per share data) January 31, 2015 Net sales ...Cost of sales ...Gross profit ...Selling, general and administrative expenses ...Pre-opening expenses ...

  • Page 57
    Ulta Salon, Cosmetics & Fragrance, Inc. Consolidated Statements of Cash Flows Fiscal year ended February 1, February 2, 2014 2013 (In thousands) January 31, 2015 Operating activities Net income ...$ 257,135 $ 202,849 $ 172,549 Adjustments to reconcile net income to net cash provided by operating ...

  • Page 58
    Ulta Salon, Cosmetics & Fragrance, Inc. Consolidated Statements of Stockholders' Equity (In thousands) Common Stock Issued Shares Amount Additional Paid-In Capital Treasury Common Stock Treasury Shares Amount Retained Earnings Total Stockholders' Equity Balance - January 28, 2012 ...Stock ...

  • Page 59
    ... 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, 2015, the Company operated 774 stores in 47 states. As used in these notes and throughout this Annual Report...

  • Page 60
    ...free beauty products based on the level of purchases. 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 these loyalty programs at January 31, 2015 and February 1, 2014...

  • Page 61
    ... Net sales include merchandise sales, salon service revenue and e-commerce revenue. Revenue from merchandise sales at 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...

  • Page 62
    ..., using the treasury stock method (see Note 11, "Net income per common share"). Recent accounting pronouncements In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers, issued as a new Topic, Accounting Standards...

  • Page 63
    ... to a third party for products and services for future distribution centers for which a lease had been signed, advertising and other goods and service contracts entered into in the ordinary course of business. The amount relates primarily to the multi-year supply chain initiatives and payments under...

  • Page 64
    ... of the following: (In thousands) January 31, 2015 February 1, 2014 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 65
    ... financial statements. Income tax-related interest and penalties were insignificant for fiscal 2014 and 2013. The Company files tax returns in the U.S. Federal and State jurisdictions. The Company is no longer subject to U.S. Federal examinations by the Internal Revenue Services for years...

  • Page 66
    ... Balance Sheets in Short-term investments. The contractual maturity of the Company's investments was less than twelve months at January 31, 2015. 10. Share-based awards Equity incentive plans The Company has had a number of equity incentive plans over the years. The plans were adopted in order...

  • Page 67
    incentive to employees, directors, and consultants to promote the success of the Company's business. Incentive compensation was awarded under the Amended and Restated Restricted Stock Option Plan until April 2002 and under the 2002 Equity Incentive Plan through July 2007, at which time the 2007 ...

  • Page 68
    ...last reported sale price of our common stock on the NASDAQ Global Select Market on January 31, 2015 was $131.94 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 69
    ...per common share for fiscal years 2014, 2013 and 2012 exclude 686, 658 and 533 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 70
    ... 13. Valuation and qualifying accounts Balance at beginning of period Charged to costs and expenses Deductions (In thousands) Balance at end of period Description Fiscal 2014 Allowance for doubtful accounts ...Shrink reserve ...Inventory - lower of cost or market reserve ...Insurance: Workers Comp...

  • Page 71
    ....58 from the 2013 Share Repurchase Program. During fiscal 2014, we purchased 321 shares of common stock for $39,923 at an average price of $124.31 from the 2014 Share Repurchase Program. 16. Subsequent event On March 12, 2015, the Company announced that our Board of Directors authorized an increase...

  • Page 72
    ... Plan Letter Agreement 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...

  • Page 73
    ...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 List of Subsidiaries Consent of Independent Registered Public Accounting Firm Certification of the Chief Executive Officer...

  • Page 74
    ... Description of document Filed Herewith Form Incorporated by Reference Exhibit File Number Number Filing Date 101.CAL 101.LAB 101.PRE 101.DEF XBRL Taxonomy Extension Calculation XBRL Taxonomy Extension Labels XBRL Taxonomy Extension Presentation XBRL Taxonomy Extension Definition X X X X 70

  • Page 75
    ..., on April 1, 2015. 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 76
    ... 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 Director Date: April 1, 2015

  • Page 77
    ... Scott M. Settersten, certify that: 1. I have 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 necessary to make the statements made, in...

  • Page 78
    ...undersigned Chief Financial Officer 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 January 31, 2015 (the "Report"), fully complies with the requirements of section 13(a) or 15(d) of the Securities...

  • Page 79
    ... am on Thursday, June 3, 2015, at: ULTA Beauty Company Headquarters 1000 Remington Boulevard, Suite 120 Bolingbrook, IL 60440 David Kimbell Chief Merchandising and Marketing Officer Transfer Agent and Registrar American Stock Transfer & Trust Company Operations Center 6201-15th Avenue Brooklyn, NY...

  • Page 80
    PRESTIGE COSMETICS PRESTIGE SKIN DERMALOGICA SKIN SERVICES FRAGRANCE THE SALON BENEFIT BROW BAR PRIVATE LABEL PROFESSIONAL HAIR CARE

  • Page 81
    ALL THINGS BEAUTY. ALL IN ONE PLACE. â„¢

  • Page 82