UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Washington, DC 20549
FORM 10-K
| þ | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the fiscal year ended February 2, 2008
or
| o | 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 name of Registrant as specified in its charter)
| Delaware (State or other jurisdiction of incorporation or organization) 1000 Remington Blvd., Suite 120 Bolingbrook, Illinois (Address of principal executive offices) |
36-3685240 (I.R.S. Employer Identification No.) 60440 (Zip code) |
Registrant’s telephone number, including area code: (630) 410-4800
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Name of each exchange on which registered | |
| Common stock, par value $0.01 per share | The NASDAQ Global Select Market |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. o Yes þ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. o Yes þ No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
(§229.405) is not contained herein, and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in
Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o | |||
| (Do not check if a smaller reporting company) | ||||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). o Yes þ No
The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon
the closing sale price of the common stock on April 10, 2008, as reported on the NASDAQ Global
Select Market, was approximately $291.1 million. The registrant has elected to use April 10, 2008
as the calculation date because as of August 4, 2007 (the last business day of the registrant’s
most recent second fiscal quarter), the registrant was a privately-held concern. Shares of the
registrant’s common stock held by each executive officer and director and by each entity or person
that, to the registrant’s knowledge, owned 5% or more of the registrant’s outstanding common stock
as of April 10, 2008 have been excluded in that such persons may be deemed to be affiliates of the
registrant. This determination of affiliate status is not necessarily a conclusive determination
for other purposes.
The number of shares of the registrant’s common stock, par value $0.01 per share, outstanding as of
April 10, 2008 was 56,995,738 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Information required in response to Part III of Form 10-K (Items 10, 11, 12, 13 and 14) is hereby
incorporated by reference to the registrant’s Proxy Statement for the Annual Meeting of
Stockholders to be held during the current fiscal year. The Proxy Statement will be filed by the
registrant with the SEC no later than 120 days after the close of the fiscal year covered by this
Form 10-K.
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ULTA SALON, COSMETICS & FRAGRANCE, INC.
TABLE OF CONTENTS
TABLE OF CONTENTS
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FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements, which may be identified by the
use of words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,”
“outlook,” and other words and terms of similar meaning. Such statements reflect our current view
with respect to future events and are subject to certain risks, uncertainties and assumptions. A
variety of factors could cause our future results to differ materially from the anticipated results
expressed in such forward-looking statements. Readers should review Item 1A, “Risk Factors,” of
this Annual Report on Form 10-K for a description of important factors that could cause future
results to differ materially from those contemplated by the forward-looking statements made in this
Annual Report on Form 10-K. In addition, general economic conditions, acquisitions and development
of new businesses, product availability, sales volumes, promotional activity of our competitors,
profit margins, weather, foreign currency fluctuation, availability of suitable real estate
locations, our ability to react to a disaster recovery situation, and the impact of labor markets
and new product introductions on our overall profitability, among other things, could cause our
future results to differ materially from those projected in any such forward-looking statements. We
undertake no obligation to update any forward-looking statements to reflect events or circumstances
after the date of such statements.
Part I
Item 1. Business
Overview
Ulta Salon, Cosmetics & Fragrance, Inc. (referred to as the “Company,” “Ulta,” “we,” “us” and “our”
unless specified otherwise) is the largest beauty retailer that provides one-stop shopping for
prestige, mass and salon products and salon services in the United States. We focus on providing
affordable indulgence to our customers by combining the product breadth, value and convenience of a
beauty superstore with the distinctive environment and experience of a specialty retailer. Key
aspects of our business include:
One-Stop Shopping. Our customers can satisfy all of their beauty needs at Ulta. We offer a
unique combination of over 21,000 prestige and mass beauty products organized by category in
bright, open, self-service displays to encourage our customers to play, touch, test, learn
and explore. We believe we offer the widest selection of categories across prestige and mass
cosmetics, fragrance, haircare, skincare, bath and body products and salon styling tools. We
also offer a full-service salon and a wide range of salon haircare products in all of our
stores.
Our Value Proposition. We believe our focus on delivering a compelling value proposition to
our customers across all of our product categories is fundamental to our customer loyalty.
For example, we run 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 and lifestyle centers with other destination retailers. Our
typical store is approximately 10,000 square feet, including approximately 950 square feet
dedicated to our full-service salon. Our displays, store design and open layout allow us the
flexibility to respond to consumer trends and changes in our merchandising strategy.
In addition to the fundamental elements of a beauty superstore, we strive to offer an uplifting
shopping experience through what we refer to as “The Four E’s”: Escape, Education, Entertainment
and Esthetics.
Escape. We strive to offer our customers a timely escape from the stresses of daily life in a
welcoming and approachable environment. Our customer can immerse herself in our extensive
product selection, indulge herself in our hair or skin treatments, or discover new and
exciting products in an interactive setting. We provide a shopping experience without the
intimidating, commission-oriented and brand-dedicated sales approach that we believe is found
in most department stores and with a level of service that we believe is typically
unavailable in drug stores and mass merchandisers.
Education. We staff our stores with a team of well-trained beauty consultants and
professionally licensed estheticians and stylists whose mission is to educate, inform and
advise our customers regarding their beauty needs. We also provide product education through
demonstrations, in-store videos and informational displays. Our focus on educating our
customer reinforces our authority as her primary resource for beauty products and our
credibility as a provider of consistent, high-quality salon services. Our beauty consultants
are trained to service customers across all prestige lines and within our prestige
“boutiques” where customers can receive a makeover or skin analysis.
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Entertainment. The entertainment experience for our customer begins at home when she receives
our catalogs. Our catalogs are designed to introduce our customers to our newest products and
promotions and to be invitations to come to Ulta to play, touch, test, learn and explore. A
significant percentage of our sales throughout the year is derived from new products, making
every visit to Ulta an opportunity to discover something new and exciting. In addition to
providing approximately 3,900 testers in categories such as fragrance, cosmetics, skincare,
and salon styling tools, we further enhance the shopping experience and store atmosphere
through live demonstrations from our licensed salon professionals and beauty consultants, and
through customer makeovers and in-store videos.
Esthetics. We strive to create a visually pleasing and inviting store and salon environment
that exemplifies and reinforces the quality of our products and services. Our stores are
brightly lit, spacious and attractive on the inside and outside of the store. Our store and
salon design features sleek, modern lines that reinforce our status as a fashion authority,
together with wide aisles that make the store easy to navigate and pleasant lighting to
create a luxurious and welcoming environment. This strategy enables us to provide an
extensive product selection in a well-organized store and to offer a salon experience that is
both fashionable and contemporary.
We were founded in 1990 as a discount beauty retailer at a time when prestige, mass and salon
products were sold through distinct channels — department 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 to understand and embrace what
women want in a beauty retailer and transform Ulta into the shopping experience that it is today.
We conducted extensive research and surveys to analyze customer response and our effectiveness in
areas such as in-store experience, merchandise selection, salon services and marketing strategies.
Based on our research and customer surveys, we pioneered what we believe to be a unique retail
approach that focuses on all aspects of how women prefer to shop for beauty products by combining
the fundamental elements of a beauty superstore, including one-stop shopping, a compelling value
proposition and convenient locations, together with an uplifting specialty retail experience
through our emphasis on “The Four E’s”. While we are currently executing on the core elements of
our business strategy, we plan to continually refine our approach in order to further enhance the
shopping experience for our customers.
Our competitive strengths
We believe the following competitive strengths differentiate us from our competitors and are
critical to our continuing 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,
drug stores and mass merchandisers, we offer all of these products in one retail format so that our
customer can find everything she needs in one shopping trip. We appeal to a wide range of customers
by offering over 500 brands, such as Bare Escentuals cosmetics, Chanel and Estée Lauder fragrances,
L’Oréal haircare and cosmetics and Paul Mitchell haircare. We also have private label Ulta
offerings in key categories. Because our offerings span a broad array of product categories in
prestige, mass and salon, we appeal to a wide range of customers including women of all ages,
demographics, and lifestyles.
Our unique customer experience. We combine the value and convenience of a beauty superstore with
the distinctive environment and experience of a specialty retailer. The “Four E’s” provide the
foundation for our operating strategy. We cater to the woman who loves to indulge in shopping for
beauty products as well as the woman who is time constrained and comes to the store knowing exactly
what she wants. Our distribution infrastructure consistently delivers a greater than 95% in-stock
rate, so our customers know they will find the products they are looking for. Our well-trained
beauty consultants are not commission-based or brand-dedicated and therefore can provide unbiased
and customized advice tailored to our customers’ needs. Together with our customer service
strategy, our store locations, layout and design help create our unique retail shopping experience,
which we believe increases both the frequency and length of our customers’ visits.
Retail 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 enabled the specialty retail channel in which we operate to grow at a greater rate than
the industry overall since at least 2000. We are capitalizing on these trends by offering a
primarily off-mall, service-oriented specialty retail concept with a comprehensive product mix
across categories and price points.
Loyal and active customer base. We have approximately six million customer loyalty program members,
the majority of whom have shopped at one of our stores within the past 12 months. We utilize this
valuable proprietary database to drive traffic, better understand our customers’ purchasing
patterns and support new store site selection. We regularly distribute catalogs and newspaper
inserts to entertain and educate our customers and, most importantly, to drive traffic to our
stores.
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Strong vendor relationships across product categories. We have strong, active relationships with
over 300 vendors, including Estée Lauder, Bare Escentuals, Coty, L’Oréal and Procter & Gamble. We
believe the scope and extent of these relationships, which span the three distinct beauty
categories of prestige, mass and salon and have taken years to develop, create a significant
impediment for other retailers to replicate our model. These relationships also frequently afford
us the opportunity to work closely with our vendors to market both new and existing brands in a
collaborative manner.
Experienced management team. We have an experienced senior management team with extensive beauty
and retail experience that brings a creative merchandising approach and a disciplined operating
philosophy to our business. Our senior management team is led by Lyn Kirby, our President and Chief
Executive Officer and Gregg Bodnar, our Chief Financial Officer. Additionally, over the past three
years, we have significantly expanded the depth of our management team at all levels and in all
functional areas to support our growth strategy.
Growth strategy
We intend to expand our presence as a leading retailer of beauty products and salon services by:
Growing our store base to our long-term potential of over 1,000 stores. We believe our successful
track record of opening new stores in diverse markets throughout the United States demonstrates the
portability and growth potential of our retail concept.
| • | Based on the broad demographic appeal of our retail concept, the significant size of the market in which we operate and our internal real estate planning model which we use to evaluate potential new store growth opportunities, we believe we have the potential to grow our store base to over 1,000 Ulta stores in the United States over the next 10 years. Our internal real estate model takes into account a number of variables, including demographic and sociographic 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 in new markets. | ||
| • | Our plan to grow our store base to over 1,000 stores in the United States over the next 10 years requires us to expand our current distribution infrastructure, hire and train additional store associates, maintain strong vendor relationships and raise additional funds for capital and working capital needs for new stores and infrastructure expansion. | ||
| • | We recently began operating a second distribution facility in Phoenix, Arizona. We are receiving vendor product at the new facility and expect to begin shipping to our Phoenix, Arizona stores beginning in late April 2008. We also plan to expand our distribution infrastructure in the future as appropriate to service our future store growth. We currently have recruiting and training programs and related infrastructure in place to hire and train store associates for new stores and plan to expand these programs and the related infrastructure as appropriate to meet the requirements for our future growth plans. Our strong vendor relationships allow us to satisfy our ongoing product replenishment needs, while continuing to respond to beauty trends by changing out products on a regular basis, as we continue to grow our store base. In addition, on June 29, 2007, we amended our credit facility to provide $50 million in additional borrowings up to a limit of $150 million to support our growth plans. This amendment also includes a $50 million accordion option to provide additional borrowings up to a total of $200 million under the amended credit facility to fund our future growth plans. We intend to use cash flow from operations and borrowings under our amended credit facility (including future amendments) to support our growth plans. | ||
| • | We opened 53 stores in fiscal 2007. In addition, we developed and initiated a store remodel program in 2006 to update our older stores to provide a modern and consistent shopping experience across all of our locations. We remodeled 17 stores in fiscal 2007. We believe this program will improve the appeal of our stores, drive additional traffic and increase our sales and profitability. |
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| Fiscal Year | ||||||||||||||||||||
| 2003 | 2004 | 2005 | 2006 | 2007 | ||||||||||||||||
Total stores beginning of period |
112 | 126 | 142 | 167 | 196 | |||||||||||||||
Stores opened |
15 | 20 | 25 | 31 | 53 | |||||||||||||||
Stores closed |
(1 | ) | (4 | ) | — | (2 | ) | — | ||||||||||||
Total stores end of period |
126 | 142 | 167 | 196 | 249 | |||||||||||||||
Stores remodeled |
2 | — | 1 | 7 | 17 | |||||||||||||||
Total square footage |
1,285,857 | 1,464,330 | 1,726,563 | 2,023,305 | 2,589,244 | |||||||||||||||
Average square footage per store |
10,205 | 10,312 | 10,339 | 10,323 | 10,399 | |||||||||||||||
Increasing our sales and profitability by expanding our prestige brand offerings. Our strategy is
to continue to expand our portfolio of products and brands, in particular to enhance our offering
of prestige brands, both by capitalizing on the success of our existing vendor relationships and by
identifying and developing new supply sources. We plan to continue to expand and attract additional
prestige brands to our stores by increasing education for our beauty consultants, providing high
levels of customer service, and tailoring the presentation and merchandising of these products in
our stores to appeal to prestige vendors. For example, as of February 2, 2008, we have installed
“boutique” areas of approximately 200 square feet in over 90 of our stores to showcase and build
brand equity for key vendors and to provide our customers with a place to experiment and learn
about these products. We intend to install this feature in most of our stores over time. Over the
last three years, we have added several prestige brands including Estée Lauder fragrance, Frédéric
Fekkai and Nick Chavez haircare, Smashbox and Stila cosmetics, Dermalogica skin care and T3 salon
styling tools. We believe this strategy will result in a continued increase in our number of
transactions and our average transaction value.
Improving our profitability by leveraging our fixed costs. We plan to continue to improve our
operating results by leveraging our existing infrastructure and continually optimizing our
operations. We will continue to make investments in our information systems to enable us to enhance
our efficiency in areas such as merchandise planning and allocation, inventory management,
distribution and point of sale (POS) functions. We believe we will continue to improve our
profitability by reducing our operating expenses, in particular general corporate overhead and
fixed costs, as a percentage of sales.
Continuing to enhance our brand awareness to generate sales growth. We believe a key component of
our success is the brand exposure we get from our marketing initiatives. Our direct mail
advertising programs are designed to drive additional traffic to our stores by highlighting current
promotional events and new product offerings. Our national magazine print advertising campaign
exposes potential new customers to our retail concept by conveying an attractive and sophisticated
brand message. We believe we have an opportunity to increase our in-store marketing efforts as an
additional means of educating our customers and increasing the frequency of their visits to our
stores.
Driving increased customer traffic to our salons. We are committed to establishing Ulta as a
leading salon authority. We seek to increase salon traffic and grow salon revenues by providing
high quality and consistent services from our licensed stylists, who are knowledgeable about the
newest hair fashion trends. Our objective is to create customer loyalty, increase conversion of our
retail customers to our salon services, encourage referrals and distinguish our salons from those
of our competitors. Our stylists are trained to sell haircare products to their customers by
demonstrating the products while styling their customers’ hair. Additionally, we have refined our
recruiting methods, hiring procedures and training programs to enhance stylist retention, which is
an important factor in salon productivity.
Expanding our e-commerce business. We launched a new version of our Ulta.com website and e-commerce
platform in November 2007 to enhance the overall Ulta experience with greater functionality,
ease-of-use and integration with our customer loyalty program. We also intend to establish
ourselves over time as a leading online beauty resource for women by providing our customers with
information on key trends and products, including editorial content, expanded assortments, and
leading website features and functionality . Through the re-launch of our website and our
multi-channel marketing initiatives, we believe we 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.
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Our market
We operate within the large and steadily growing U.S. beauty products and salon services industry.
This market represents approximately $75 billion in retail sales, according to Kline & Company and
IBISWorld Inc. The approximately $35 billion beauty products industry includes color cosmetics,
haircare, fragrance, bath and body, skincare, salon styling tools and other toiletries. Within this
market, we compete across all major categories as well as a range of price points by offering
prestige, mass and salon products. The approximately $40 billion salon services industry consists
of hair, face 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 sold in salons
and authorized professional retail outlets.
Competition
Our major competitors for prestige and mass products include traditional department stores such as
Macy’s and Nordstrom, specialty stores such as Sephora and Bath & Body Works, drug stores such as
CVS/pharmacy and Walgreens and mass merchandisers such as Target and Wal-Mart. We believe the
principal bases upon which we compete are the quality of merchandise, our value proposition, the
quality of our customers’ shopping experience and the convenience of our stores as one-stop
destinations for beauty products and salon services.
The market for salon services and products is highly fragmented. Our competitors for salon services
and products include Regis Corp., Sally Beauty, JCPenney salons and independent salons.
Key trends
We believe an important shift is occurring in the distribution of beauty products. Department
stores, which have traditionally been the primary distribution channel for prestige beauty
products, have been meaningfully affected by changing consumer preferences and industry
consolidation over the past decade. We believe women, particularly younger generations, tend to
find department stores intimidating, high-pressured and hinder a multi-brand shopping experience
and, as such, are choosing to shop elsewhere for their beauty care needs. According to NPD, 55% of
women aged 18 to 24 shop in specialty stores, compared to 40% of women aged 18 to 64. Over the past
ten years, department stores have lost significant market share to specialty stores in apparel, and
we believe the beauty category is undergoing a similar shift in retail channels. We believe women
are seeking a shopping experience that provides something different, a place to experiment, learn
about various products, find what they want and indulge themselves. A recent NPD study found that
nine out of ten women who shop at specialty retailers for beauty products do so because they can
touch, feel and smell the products.
As a result of this market transformation, there has been an increase in the number of prestige
beauty brands pursuing new distribution channels for their products, such as specialty retail, spas
and salons, direct response television (i.e., home shopping and infomercials) and the Internet. In
addition, many smaller prestige brands are selling their products through these channels due to the
high fixed costs associated with operating in most department stores and to capitalize on
consumers’ growing propensity to shop in these channels. According to industry sources, color
cosmetics sales through these channels are projected to grow at a higher rate than sales of color
cosmetics in total. We believe that, based on our recent success in attracting new prestige brands,
we are well-positioned to continue to capture additional prestige brands as they expand into
specialty stores. Also, there are a growing number of brands that have built significant consumer
awareness and sales by initially offering their products on direct response television. We benefit
from offering brands that sell their products through this channel, as we experience increased
store traffic and sales after these brands appear on television.
Historically, manufacturers have distributed their products through distinct channels—department
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. We attribute this trend to a number of factors, including the growing availability of
prestige brands outside of department stores and increased innovation in mass products. Based on
the competitive environment in which we operate, we believe that we have been at the forefront of
breaking down the industry’s historical distribution paradigm by combining a wide range of beauty
products, categories and price points under one roof. Our strategy reflects a more customer-centric
model of how women prefer to shop today for their beauty needs.
Major growth drivers for the industry include favorable consumer spending trends, product
innovation and growth of certain population segments.
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| • | Baby Boomers (born between 1946 and 1964): Baby Boomers have large disposable incomes and are increasing their spending on personal care as well as health and wellness. The aging of the Baby Boomer generation is also influencing product innovation and demand for anti-aging products and cosmetic procedures. | ||
| • | Generation X (born between 1965 and 1976): Generation X is entering their peak earning years and represents a significant contributor to overall consumer spending, including beauty products. A recent survey by American Express showed that Generation X spends 60% more on beauty products than Baby Boomers. In addition, while prior generations grew up shopping in department stores and general merchandisers, Generation X has grown up shopping in specialty stores and we believe seeks a retail environment that combines a compelling experience, functionality, variety and location. | ||
| • | Generation Y (born between 1977 and 1994): According to U.S. Census Bureau data, the 20 to 34 year-old age group is expected to grow by approximately 10% from 2003 to 2015. As Generation Y continues to enter the workforce, they will have increased disposable income to spend on beauty products. |
We believe we are well positioned to capitalize on these trends and capture additional market share
in the industry. We believe we have demonstrated an ability to provide a differentiated store
experience for customers as well as offer a breadth and depth of merchandise previously unavailable
from more traditional beauty retailers.
Stores
We are conveniently located in high-traffic, primarily off-mall locations such as power centers and
lifestyle centers with other destination retailers. Our typical store is approximately 10,000
square feet, including approximately 950 square feet dedicated to our full-service salon. We opened
53 stores in fiscal 2007 and 31 stores in fiscal 2006. During fiscal 2007, the average investment
required to open a new Ulta store was approximately $1.5 million, which includes capital
investments, net of landlord contributions, pre-opening expenses, and initial inventory, net of
payables. However, our net investment required to open new stores and the net sales generated by
new stores may vary depending on a number of factors, including geographic location. As of February
2, 2008, we operated 249 stores in 31 states.
Store remodel program
Our retail store concept, including physical layout, displays, lighting and quality of finishes,
has continued to evolve 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 a result, we decided to limit the investments made in our existing
store base from fiscal 2000 to fiscal 2005. In fiscal 2006, we developed and initiated a store
remodel program to update our older stores to provide a consistent shopping experience across all
of our locations. We remodeled 17 stores in fiscal 2007 and 7 stores in fiscal 2006. We believe
this program will improve the appeal of our stores, drive additional customer traffic and increase
our sales and profitability. The remodel store selection process is subject to the same discipline
as our new store real estate decision process. Our focus is to remodel the oldest, highest
performing stores first, subject to criteria such as rate of return, lease terms, market
performance and quality of real estate. The average investment to remodel a store in fiscal 2007
was approximately $1.0 million. Each remodel takes approximately 13 weeks to complete, during which
time we typically keep the store open.
Salon
We operate full-service salons in all of our stores. Our current Ulta store format includes an open
and modern salon area with eight to ten stations. The entire salon area is approximately 950 square
feet with a concierge desk, esthetics room, semi-private shampoo and hair color processing areas.
Each salon is a full-service salon offering hair cuts, hair coloring, permanent texture, with most
salons also providing facials and waxing. We employ licensed professional stylists and estheticians
that offer highly skilled services as well as an educational experience, including consultations,
styling lessons, skincare regimens, and at-home care recommendations.
Ulta.com
We established Ulta.com to give our customers an integrated multi-channel buying experience by
providing them with an opportunity to access product offerings and information beyond our
brick-and-mortar retail stores. We launched a new version of our Ulta.com website and e-commerce
platform in November 2007. The new Ulta.com more effectively supports the key elements of the Ulta
brand proposition and provides access to more than 9,000 beauty products from over 400 brands. We
also intend to establish ourselves over
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time as a leading online beauty resource for women by providing our customers with information on key trends and products, including editorial content,
expanded assortments, and leading website features and functionality. Additionally, Ulta.com
serves as an extension of Ulta’s marketing and prospecting strategies (beyond catalogs, newspaper
inserts and national advertising) by exposing potential new customers to the Ulta brand and product
offerings. This role for Ulta.com is being implemented through online marketing strategies including banner advertising, search marketing, and use of other online
marketing channels. Ulta.com’s email marketing programs are also effective in communicating with
and driving sales from online and retail store customers. As Ulta.com continues to grow in terms of
functionality and content, it will become an important element in Ulta’s customer loyalty programs
and a valued resource for customers to access product and store information, beauty trends and
techniques, and buy from a large assortment of product offerings.
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, skincare, bath and body products and salon styling tools. A typical Ulta store carries
over 19,000 basic and over 2,000 promotional products. We present these products in an assisted
self-service environment using centrally produced planograms (detailed schematics showing product
placement in the store) and promotional merchandising planners. Our merchandising team continually
monitors current fashion trends, historical 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 can also be found in department stores,
specialty stores, salons, mass merchandisers and drug stores, but we offer all of these products in
one retail format so that our customer can find everything she needs in one stop. We believe we
offer a compelling value proposition to our customers across all of our product categories. For
example, we run 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.
We believe our private label products are a strategically important category for growth and profit
contribution. Our objective is to provide quality, trend-right private label products at a good
value to continue to strengthen our customers’ perception of Ulta as a contemporary beauty
destination. Ulta manages the full development cycle of these products from concept through
production in order to deliver differentiated packaging and formulas to build brand image. Current
Ulta cosmetics and bath brands have a strong following and we have plans to expand our private
label products into additional categories.
Category mix
We offer products in the following categories:
| • | Cosmetics, which includes products for the face, eyes, cheeks, lips and nails; | ||
| • | Haircare, which includes shampoos, conditioners, styling products, and hair accessories; | ||
| • | Salon styling tools, which includes hair dryers, curling irons and flat irons; | ||
| • | Skincare and bath and body, which includes products for the face, hands and body; | ||
| • | Fragrance for both men and women; | ||
| • | Private label, consisting of Ulta branded cosmetics, skincare, bath and body products; 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 Chief Executive Officer and consists of a Vice
President of Prestige Cosmetics and Prestige Skincare, Vice President of Mass Cosmetics, Skincare
and Haircare, Vice President of Salon Products, Styling Tools and Merchandise Replenishment, and a
Divisional Merchandise Manager Fragrance, Bath and Gift with Purchase. Reporting to the Vice
Presidents and Divisional Merchandise Manager Fragrance is a team of approximately 21 Divisional
Merchandise Managers, Senior Buyers, Buyers and Assistant/Associate Buyers. Our merchandising team
works directly with our centralized planning and replenishment group to ensure a consistent
delivery of products across our store base.
Our planogram department assists the merchants to keep new products flowing into stores on a timely
basis. All major product categories undergo planogram revisions once or twice a year and
adjustments are made to assortment mix and product placement based on current sales trends.
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Our visual department works with our merchandising team on every advertising event regarding
strategic placement of promotional merchandise, along with functional signage and creative product
presentation standards, in all of our stores. All stores receive a centrally produced promotional
planner for each event to ensure consistent implementation.
Planning and allocation
We have developed a disciplined approach to buying and a dynamic inventory planning and allocation
process to support our merchandising strategy. We centrally manage product replenishment to our
stores through our planning and replenishment group. This group serves as a strategic partner to,
and provides financial oversight of, the merchandising 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 throughout the year to balance
buying opportunities and inventory return on investment. We believe this structure maximizes our
buying opportunities while maintaining organizational and financial control. Regularly replenished
products are presented consistently in all stores utilizing a merchandising planogram process. POS
data is used to calculate sales forecasts and to determine replenishment levels. We determine
promotional product replenishment levels using sales histories from similar or comparable events.
To ensure our inventory remains productive, our planning and replenishment group, along with senior
executives, monitors the levels of clearance and aged inventory in our stores on a weekly basis. In
addition, we have structured our accounting policies to ensure appropriate clearance and movement
of aged inventory.
Vendor relationships
We work with over 300 vendors. Each merchandising vice president has over 15 years of experience
developing relationships in the industry with which he or she works. We have no long-term supply
agreements or exclusive arrangements with our vendors. Our top ten vendors represent approximately
45% of our total annual sales. These include vendors across all product categories, such as Bare
Escentuals, Farouk Systems, Helen of Troy, L’Oréal and Procter & Gamble, among others. We have
“top-to-top” meetings with each of these vendors at least once a year, which in most instances
includes our Chief Executive Officer and the vendor’s senior management team. We believe our
vendors view us as a significant distribution channel for growth and brand enhancement.
Marketing and advertising
Marketing strategy
We employ a multi-faceted marketing strategy to increase brand awareness and drive traffic to our
stores. Our marketing strategy complements a basic tenet of our business strategy, which is to
provide our customers with a satisfying and uplifting experience. We communicate this vision
through a multi-media approach. Our primary media expenditure is in direct mail catalogs and
free-standing newspaper inserts. These vehicles allow the customer to see the breadth of our
selection of prestige, mass and salon beauty products.
In order to reach new customers and to establish Ulta as a national brand, we advertise in national
magazines such as InStyle, Allure, Lucky, Elle and Vanity Fair. These advertising channels have
proven successful in raising our brand awareness on a national level and driving additional sales
from both existing and new customers. In conjunction with our national brand advertising, we have
initiated a public relations strategy that focuses on reaching top tier magazine editors to ensure
consistent messaging in beauty magazines as well as direct-to-customer efforts through multi-media
channels.
Our e-commerce advertising strategy complements our print media strategy. We send out email
distributions to our key customers, and we integrate promotional messaging in banner advertising
during certain times of the year.
Customer loyalty programs — The Club at Ulta
The strategy of our customer loyalty program, which we initiated in 1996, is to engage, motivate
and reward existing Ulta customers while increasing our customer count and sales. We have
approximately six million customer loyalty program members, the majority of whom have shopped at
one of our stores within the past 12 months. Customers sign up to become members in-store and
receive free gifts four times a year, with the value of such gifts based on customers’ spending
levels. We also send reward certificates to members in our catalogs.
Staffing and operations
Retail
Our current Ulta store format is typically staffed with a general manager, a salon manager, four
assistant managers, and approximately twenty full and part-time associates; including approximately
six to eight beauty consultants and eight to fifteen licensed salon professionals. The management
team in each store reports to the general manager. The general manager oversees all store
activities
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and salon management, which include inventory management, merchandising, cash
management, scheduling, hiring and guest services. Members of store management receive bonuses
depending on their position and on sales, shrink, payroll, or a combination of these three factors.
Each general manager reports to a district manager, who in turn reports to the Vice President of
Operations East, the Vice President of Operations West or the Senior Vice President of Operations.
The Senior Vice President of Operations 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, 11 hours a day, Monday through Saturday, and seven hours on
Sunday. Our stores have extended hours during the holiday season.
Salon
A typical salon is staffed with eight to fifteen licensed salon professionals, including one salon
manager, eight to twelve stylists, and one to two estheticians. Our higher producing salons may
also have a salon coordinator and assistant manager. Our training teams, vendor education classes
and leadership conferences create a comprehensive educational program for our approximately 2,200
salon professionals.
Training and development
Our success is dependent in part on our ability to attract, train, retain and motivate qualified
employees at all levels of the organization. We have developed a corporate culture that enables
individual store managers to make store-level operating decisions and consistently rewards their
success. We are committed to improving the skills and careers of our workforce and providing
advancement opportunities for our associates. Our associates and regional managers are essential to
our store expansion strategy. We primarily use existing managers or promote from within to support
our new stores, although many outlying stores have all-new teams.
All of our associates participate in an interactive new-hire orientation through which each
associate becomes acquainted with Ulta’s vision and mission. Training for new store managers,
beauty consultants and sales associates familiarizes them with opening and closing routines, guest
service expectations, our loss prevention policy and procedures, and our culture. We also have
ongoing development programs that include operational training for hourly associates, beauty
consultants, management and stylists. We provide continuing education to both salon professionals
and retail associates throughout their careers at Ulta to enable them to deliver the “Four E’s” to
our customers. In contrast to the sales teams at traditional department stores, our sales teams are
not commissioned or brand-dedicated. Our beauty consultants are trained to work across all prestige
lines and within our prestige “boutiques”, where customers can receive a makeover or skin analysis.
Distribution
We operate two distribution facilities. The first facility, located in Romeoville, Illinois, is
approximately 317,000 square feet in size, including an overflow facility. We recently began operating a
second distribution facility in Phoenix, Arizona that is approximately 330,000 square feet in size.
We are currently receiving vendor product at the new facility and expect to begin shipping to our
Phoenix, Arizona stores beginning in late April 2008.
Inventory is shipped from our suppliers to our distribution facilities. We carry over 21,000
products and replenish our stores with such products primarily in eaches (i.e., less-than-case
quantities), which allows us to ship less than an entire case when only one or two of a particular
product is needed. Our distribution facilities use a warehouse management software system, which
was upgraded in early 2007. Products are bar-coded and scanned using handheld radio-frequency
devices as they move within the warehouse to ensure accuracy. Product is delivered to stores using
contract carriers. One vendor currently provides store-ready orders that can be quickly forwarded
to our stores. We use advance ship notices (ASNs), and carton barcode labels to facilitate these
shipments.
Information technology
We are committed to using technology to enhance our competitive position. We depend on a variety of
information 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 human resources. Our core business systems consist mostly of a purchased
software program that integrates 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 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 our
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stores, distribution infrastructure and corporate headquarters on a continual basis. We will continue to make
investments in our information systems to facilitate our growth and enable us to enhance our
competitive position.
Intellectual property
We have registered a number of trademarks in the United States including, Ulta Salon Cosmetics
Fragrance (and design), Ulta.com, Ulta Beauty and two related designs, and several brands and
service marks. The renewal dates for these marks are January 22, 2012, October 8, 2012, July 10,
2017 and October 16, 2017, respectively. All marks that are deemed material to our business have
been protected in the United States, Canada and select foreign countries.
We believe our trademarks, especially those related to the Ulta concept, have significant value and
are important to building brand recognition.
Government regulation
In our U.S. markets, we are affected by extensive laws, governmental regulations, administrative
determinations, court decisions and similar constraints. Such laws, regulations and other
constraints may exist at the federal, state or local levels in the United States. Our Ulta branded
products are subject to regulation by the Food and Drug Administration (FDA), the Federal Trade
Commission (FTC) and State Attorneys General in the United States. Such regulations principally
relate to the safety of our ingredients, proper labeling, advertising, packaging and marketing of
our products.
Products classified as cosmetics (as defined in the Food, Drug and Cosmetic (FDC) Act) are not
subject to pre-market approval by the FDA, but the products and the ingredients must be tested to
ensure safety. The FDA also utilizes an “intended use” doctrine to determine whether a product is a
drug or cosmetic by the labeling claims made for the product. Certain ingredients commonly used in
cosmetics products such as sunscreens and acne treatment ingredients are classified as
over-the-counter drugs which have specific label requirements and allowable claims. The labeling of
cosmetic products is subject to the requirements of the FDC Act, the Fair Packaging and Labeling
Act and other FDA regulations.
The government regulations that most impact our day-to-day operations are the labor and employment
and taxation laws to which most retailers are typically subject. We are also subject to typical
zoning and real estate land use restrictions and typical advertising and consumer protection laws
(both federal and state). Our salon business is subject to state board regulations and state
licensing requirements for our stylists and our salon procedures.
In our store leases, we require our landlords to obtain all necessary zoning approvals and permits
for the site to be used as a retail site and we also ask them to obtain any zoning approvals and
permits for our specific use (but at times the responsibility of obtaining zoning approvals and
permits for our specific use falls to us). We require our landlords to deliver a certificate of
occupancy for any work they perform on our buildings or the shopping centers in which our stores
are located. We are responsible for delivering a certificate of occupancy for any remodeling or
build-outs that we perform and are responsible for complying with all applicable laws in connection
with such construction projects or build-outs.
Associates
As of February 2, 2008, we employed approximately 4,000 people on a full-time basis and
approximately 3,900 on a part-time basis. We have no collective bargaining agreements. We have not
experienced any work stoppages and believe we have good relationships with our 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 reports on Form
8-K, and all amendments to those reports as soon as reasonably practicable after such material is
electronically filed with or furnished to the SEC. Information available on our website is not
incorporated by reference in and is not deemed a part of this Form 10-K. In addition, our filings
with the SEC may be accessed through the SEC’s Electronic Data Gathering, Analysis and Retrieval
(EDGAR) system at www.sec.gov. All statements made in any of our securities filings, including all
forward-looking statements or information, are made as of the date of the document in which the
statement is included, and we do not assume or undertake any obligation to update any of those
statements or documents unless we are required to do so by law.
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Item 1A. Risk Factors
Investment in our common stock involves a high degree of risk and uncertainty. You should carefully
consider the following risks and all of the other information contained in this Form 10-K before
making an investment decision. If any of the following risks occur, our business, financial
condition, results of operations or future growth could suffer. In these circumstances, the market
price of our common stock could decline, and you may lose all or part of your investment. The risks
described below are not the only ones facing our company. Additional risks not presently known to
us or which we currently consider immaterial also may adversely affect our company.
We may be unable to compete effectively in our highly competitive markets.
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 salon chains, locally owned beauty retailers and salons, Internet businesses, catalog
retailers and direct response television, including television home shopping retailers and
infomercials. We believe the principal bases upon which we compete are the quality of merchandise,
our value proposition, the quality of our customers’ shopping experience and the convenience of our
stores as one-stop destinations for beauty products and salon services. Many of our competitors
are, and many of our potential competitors may be, larger and have greater financial, marketing and
other resources and therefore may be able to adapt to changes in customer requirements more
quickly, devote greater resources to the marketing and sale of their products, generate greater
national brand recognition or adopt more aggressive pricing policies than we can. As a result, we
may lose market share, which could have a material adverse effect on our business, financial
condition and results of operations.
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 substantial part on our ability to:
| • | recognize and define product and beauty trends; | ||
| • | anticipate, gauge and react to changing consumer demands in a timely manner; | ||
| • | translate market trends into appropriate, saleable product and service offerings in our stores and salons in advance of our competitors; | ||
| • | develop and maintain vendor relationships that provide us access to the newest merchandise on reasonable terms; and | ||
| • | distribute merchandise to our stores in an efficient and effective manner and maintain appropriate in-stock levels. |
If we are unable to anticipate and fulfill the merchandise needs of the regions in which we
operate, our net sales may decrease and we may be forced to increase markdowns of slow-moving
merchandise, either of which could have a material adverse effect on our business, financial
condition and results of operations.
If we fail to retain our existing senior management team or to attract qualified new personnel,
such failure could have a material adverse effect on our business, financial condition and results
of operations.
Our business requires disciplined execution at all levels of our organization. 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 or if we were
to lose the benefit of the experience, efforts and abilities of other key executive and buying
personnel, it could have a material adverse effect on our business, financial condition and results
of operations. Ms. Kirby has agreed to remain employed with us through March 2011. Furthermore, our
ability to manage our retail expansion will require us to continue to train, motivate and manage
our associates and to attract, motivate and retain additional qualified managerial and
merchandising personnel and store associates. Competition for this type of personnel is intense,
and we may not be successful in attracting, assimilating and retaining the personnel required to
grow and operate our business profitably.
We intend to continue to open new stores, which could strain our resources and have a material
adverse effect on our business and financial performance.
Our continued and future growth largely depends on our ability to successfully open and operate new
stores on a profitable basis. During fiscal 2007, we opened 53 new stores. We intend to continue to
grow our number of stores for the foreseeable future, and
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believe we have the long-term potential to grow our store base to over 1,000 stores in the United States over the next 10 years. During
fiscal 2007, the average investment required to open a typical new store was approximately $1.5
million. This continued expansion could place increased demands on our financial, managerial,
operational and administrative resources. For example, our planned expansion will require us to increase the number of people we employ as well as to monitor and
upgrade our management information and other systems and our distribution infrastructure. These
increased demands and operating complexities could cause us to operate our business less
efficiently, have a material adverse effect on our operations and financial performance and slow
our growth.
The capacity of our distribution and order fulfillment infrastructure may not be adequate to
support our recent growth and expected future growth plans, which could prevent the successful
implementation of these plans or cause us to incur costs to expand this infrastructure, which could
have a material adverse effect on our business, financial condition and results of operations.
We have historically operated a single distribution facility, which houses the distribution
operations for Ulta retail stores together with the order fulfillment operations of our e-commerce
business. We recently began operating a second distribution facility in Phoenix, Arizona. We are
receiving vendor product at the new facility and expect to begin shipping to our Phoenix, Arizona stores beginning in late April 2008. 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 the future. Our failure to 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, financial condition and results of operations.
Any significant interruption in the operations of our two distribution facilities could disrupt our
ability to deliver merchandise to our stores in a timely manner, which could have a material
adverse effect on our business, financial condition and results of operations.
We have historically operated from a single distribution facility and recently began operating
a second distribution facility. We distribute products to our stores without supplementing such
deliveries with direct-to-store arrangements from vendors or wholesalers. We are a retailer
carrying approximately 21,000 beauty products that change on a regular basis in response to beauty
trends, which makes the success of our operations particularly vulnerable to disruptions in our
distribution infrastructure. Any significant interruption in the operation of our distribution
infrastructure, such as disruptions in our information systems, disruptions in operations due to
fire or other catastrophic events, labor disagreements, or shipping problems, could drastically
reduce our ability to receive and process orders and provide products and services to our stores,
which could have a material adverse effect on our business, financial condition and results of
operations.
Any material disruption of our information systems could negatively impact financial results and
materially adversely affect our business operations.
We are increasingly dependent on a variety of information systems to effectively manage the
operations of our growing store base and fulfill customer orders from our e-commerce business. We
have identified the need to expand and upgrade our information systems to support recent and
expected future growth. As part of this planned expansion of our information systems, we expect to
construct a new data center and modify our warehouse management system software to support our
second distribution facility. Any interruption during the transition of our information systems to
the new data center and the modification of our warehouse management system software could have a
material adverse effect on our business, financial condition and results of operations. The failure
of our information systems to perform as designed, including the failure of our warehouse
management software system to operate as expected during the holiday season or to support our
second distribution facility, could have an adverse effect on our business and results of our
operations. Any material disruption of our systems could disrupt our ability to track, record and
analyze the merchandise that we sell and could negatively impact our operations, shipment of goods,
ability to process financial information and credit card transactions, and our ability to receive
and process e-commerce orders or engage in normal business activities. Moreover, security breaches
or leaks of proprietary information, including leaks of customers’ private data, could result in
liability, decrease customer confidence in our company, and weaken our ability to compete in the
marketplace, which could have a material adverse effect on our business, financial condition and
results of operations.
Our e-commerce operations, while relatively small, are increasingly important to our business. We
launched a new version of our Ulta.com website and e-commerce platform in November 2007. The
re-launch of our Ulta.com website and e-commerce platform is important to our marketing efforts
because the new Ulta.com website serves as a more effective extension of Ulta’s marketing and
prospecting strategies (beyond catalogs, newspaper inserts and national advertising) by better
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
these risks could reduce e-commerce sales and damage our brand’s reputation.
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A downturn in the economy may affect consumer purchases of discretionary items such as prestige
beauty products and premium salon services, which could delay our growth strategy and have a
material adverse effect on our business, financial condition, profitability and cash flows.
We appeal to a wide demographic consumer profile and offer a broad selection of prestige beauty
products at higher price points than mass beauty products. We also offer a wide selection of
premium salon services. A downturn in the economy could adversely impact consumer purchases of
discretionary items such as prestige beauty products and premium salon services. Factors that could
affect consumers’ willingness to make such discretionary purchases include general business
conditions, levels of employment, interest rates and tax rates, the availability of consumer credit
and consumer confidence in future economic conditions. In the event of an economic downturn,
consumer spending habits could be adversely affected and we could experience lower than expected
net sales, which could force us to delay or slow our growth strategy and have a material adverse
effect on our business, financial condition, profitability and cash flows.
Increased costs or interruption in our third-party vendors’ overseas sourcing operations could
disrupt production, shipment or receipt of some of our merchandise, which would result in lost
sales and could increase our costs.
We directly source the majority of our gift-with-purchase and other promotional products
through third-party vendors using foreign factories. In addition, many of our vendors use overseas
sourcing to varying degrees to manufacture some or all of their products. Any event causing a
sudden disruption of manufacturing or imports from such foreign countries, including the imposition
of additional import restrictions, unanticipated political changes, increased customs duties, legal
or economic restrictions on overseas suppliers’ ability to produce and deliver products, and
natural disasters, could materially harm our operations. We have no long-term supply contracts with
respect to such foreign-sourced items, many of which are subject to existing or potential duties,
tariffs or quotas that may limit the quantity of certain types of goods that may be imported into
the United States from such countries. Our business is also subject to a variety of other risks
generally associated with sourcing goods from abroad, such as political instability, disruption of
imports by labor disputes and local business practices. Our sourcing operations may also be hurt by
health concerns regarding infectious diseases in countries in which our merchandise is produced,
adverse weather conditions or natural disasters that may occur overseas or acts of war or terrorism
in the United States or worldwide, to the extent these acts affect the production, shipment or
receipt of merchandise. Our future operations and performance will be subject to these factors,
which are beyond our control, and these factors could materially hurt our business, financial
condition and results of operations or may require us to modify our current business practices and
incur increased costs.
Recent volatility in the global oil markets has resulted in rising fuel and freight prices, which
many shipping companies are passing on to their customers. Our shipping costs have increased, and
these costs may continue to increase. We may be unable to pass these increased costs on to our
customers, which will reduce our profitability. Additionally, recent increased demand for shipping
capacity between the United States and Asia will further increase our costs for merchandise sourced
from Asia, which could have a material adverse effect on our business, financial condition and
results of operations.
A reduction in traffic to, or the closing of, the other destination retailers in the shopping areas
where our stores are located could significantly reduce our sales and leave us with unsold
inventory, which could have a material adverse effect on our business, financial condition and
results of operations.
As a result of our real estate strategy, most of our stores are located in off-mall shopping areas
known as power centers or lifestyle centers, which also accommodate other well-known destination
retailers. Power centers typically contain three to five big-box anchor stores along with a variety
of smaller specialty tenants, while lifestyle centers typically contain a variety of high-end
destination retailers but no large anchor stores. As a consequence of most of our stores being
located in such shopping areas, our sales are derived, in part, from the volume of traffic
generated by the other destination retailers and the anchor stores in the lifestyle centers and
power centers where our stores are located. Customer traffic to these shopping areas may be
adversely affected by the closing of such destination retailers or anchor stores, or by a reduction
in traffic to such stores resulting from a regional economic downturn, a general downturn in the
local area where 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 condition and results of operations. We may respond by increasing markdowns or
initiating marketing promotions to reduce excess inventory, which would further decrease our gross
profits and net income.
Diversion of exclusive salon products, or a decision by manufacturers of exclusive salon products
to utilize other distribution channels, could negatively impact our revenue from the sale of such
products, which could have a material adverse effect on our business, financial condition and
results of operations.
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The retail products that we sell in our salons are meant to be sold exclusively by professional
salons and authorized professional retail outlets. However, incidents of product diversion occur,
which involve the selling of salon exclusive haircare products to unauthorized channels such as
drug stores, grocery stores or mass merchandisers. Diversion could result in adverse publicity that
harms the commercial prospects of our products (if diverted products are old, tainted or damaged),
as well as lower product revenues should consumers choose to purchase diverted product from these
channels rather than purchasing from one of our salons. Additionally, the various product
manufacturers could in the future decide to utilize 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 products
on reasonable terms. If these relationships were to be impaired, or if certain vendors were unable
to supply sufficient merchandise to keep pace with our growth plans, we may not be able to obtain a
sufficient selection or volume of merchandise on reasonable terms, and we may not be able to
respond promptly to changing trends in beauty products, either of which could have a material
adverse effect on our competitive position, our business and financial performance.
We have no long-term supply agreements or exclusive arrangements with vendors and, therefore, our
success depends on maintaining good relationships with our vendors. Our business depends to a
significant extent on the willingness and ability of our vendors to supply us with a sufficient
selection and volume of products to stock our stores. Some of our prestige vendors may not have the
capacity to supply us with sufficient merchandise to keep pace with our growth plans. We also have
strategic partnerships with certain core brands, which has allowed us to benefit from the growing
popularity of such brands. Any of our other core brands could in the future decide to scale back or
end its partnership with us and strengthen its relationship with our competitors, which could
negatively impact the revenue we earn from the sale of such products. If we fail to maintain strong
relationships with our existing vendors, or fail to continue acquiring and strengthening
relationships with additional vendors of beauty products, our ability to obtain a sufficient amount
and variety of merchandise on reasonable terms may be limited, which could have a negative impact
on our competitive position.
During fiscal 2007, merchandise supplied to Ulta by our top ten vendors accounted for approximately
45% 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 vendors, or by any of our other vendors, could have an adverse effect on
our business.
If we are unable to protect our intellectual property rights, our brand and reputation could be
harmed, which could have a material adverse effect on our business, financial condition and results
of operations.
We regard our trademarks, trade dress, copyrights, trade secrets, know-how and similar intellectual
property as critical to our success. Our principal intellectual property rights include registered
trademarks on our name, “Ulta,” copyrights in our website content, rights to our domain name
www.ulta.com and trade secrets and know-how with respect to our Ulta branded product formulations,
product sourcing, sales and marketing and other aspects of our business. As such, we rely on
trademark and copyright law, trade secret protection and confidentiality agreements with certain of
our employees, consultants, suppliers and others to protect our proprietary rights. If we are
unable to protect or preserve the value of our trademarks, copyrights, trade secrets or other
proprietary rights for any reason, or if other parties infringe on our intellectual property
rights, our brand and reputation could be impaired and we could lose customers.
If our manufacturers are unable to produce products manufactured uniquely for Ulta, including 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 and results
of operations.
We do not own or operate any manufacturing facilities and therefore depend upon independent
third-party vendors for the manufacture of all products manufactured uniquely for Ulta, including
Ulta branded products and gift-with-purchase and other promotional products. Our third-party
manufacturers of Ulta products may not maintain adequate controls with respect to product
specifications and quality and may not continue to produce products that are consistent with
applicable regulatory requirements. If we or our third-party manufacturers fail to comply with
applicable regulatory requirements, we could be required to take costly corrective action. In
addition, sanctions under the FDC Act may include seizure of products, injunctions against future
shipment of products, restitution and disgorgement of profits, operating restrictions and criminal
prosecution. The FDA does not have a pre-market approval system for cosmetics, and we believe we
are permitted to market our cosmetics and have them manufactured without submitting safety or
efficacy data to the FDA. However, the FDA may in the future determine to regulate our cosmetics or
the ingredients included in our cosmetics as drugs. These events could interrupt the marketing and
sale of our Ulta products, severely damage our brand
17
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 quantities or of sufficient quality to our stores, any
of which could result in lost sales, which could have a material adverse effect on our business,
financial condition and results of operations.
We, as well as our vendors, are subject to laws and regulations that could require us to modify our
current business practices and incur increased costs, which could have a material adverse effect on
our business, financial condition and results of operations.
In our U.S. markets, numerous laws and regulations at the federal, state and local levels can
affect our business. Legal requirements are frequently changed and subject to interpretation, and
we are unable to predict the ultimate cost of compliance with these requirements or their effect on
our operations. If we fail to comply with any present or future laws or regulations, we could be
subject to future liabilities, a prohibition on the operation of our stores or a prohibition on the sale of
our Ulta branded products. In particular, failure to adequately comply with the following legal
requirements could have a material adverse effect on our business, financial conditions and results
of operations:
| • | Our rapidly expanding workforce, growing in pace with our number of stores, makes us vulnerable to changes in labor and 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 regulations and state licensing requirements for our stylists and our salon procedures. Failure to maintain compliance with these regulatory and licensing requirements could jeopardize the viability of our salons. | ||
| • | We operate stores in California, which has enacted legislation commonly referred to as “Proposition 65” requiring that “clear and reasonable” warnings be given to consumers who are exposed to chemicals known to the State of California to cause cancer or reproductive toxicity. Although we have sought to comply with Proposition 65 requirements, there can be no assurance that we will not be adversely affected by litigation relating to Proposition 65. |
In addition, the formulation, manufacturing, packaging, labeling, distribution, sale and storage of
our vendors’ products and our Ulta products are subject to extensive regulation by various federal
agencies, including the FDA, the FTC and state attorneys general in the United States. If we, our
vendors or the manufacturers of our Ulta products fail to comply with those regulations, we could
become subject to significant penalties or claims, which could harm our results of operations or
our ability to conduct our business. In addition, the adoption of new regulations or changes in the
interpretations of existing regulations may result in significant compliance costs or
discontinuation of product sales and may impair the marketability of our vendors’ products or our
Ulta products, resulting in significant loss of net sales. Our failure to comply with FTC or state
regulations that cover our vendors’ products or our Ulta product claims and advertising, including
direct claims and advertising by us, may result in enforcement actions and imposition of penalties
or otherwise harm the distribution and sale of our products.
As we grow the number of our stores in new cities and states, we are subject to local building
codes in an increasing number of local jurisdictions. Our failure to comply with local building
codes, and the failure of our landlords to obtain certificates of occupancy in a timely manner,
could cause delays in our new store openings, which could increase our store opening costs, cause
us to incur lost sales and profits, and damage our public reputation.
Ensuring compliance with local zoning and real estate land use restrictions across numerous
jurisdictions is increasingly challenging as we grow the number of our stores in new cities and
states. Our store leases generally require us to provide a certificate of occupancy with respect to
the interior build-out of our stores (landlords generally provide the certificate of occupancy with
respect to the shell of the store and the larger shopping area and common areas), and while we
strive to remain in compliance with local building codes relating to the interior buildout of our
stores, the constantly increasing number of local jurisdictions in which we operate makes it
increasingly difficult to stay abreast of changes in, and requirements of, local building codes and
local building and fire inspectors’ interpretations of such building codes. Moreover, our landlords
have occasionally been unable, due to the requirements of local zoning laws, to obtain in a timely
manner a certificate of occupancy with respect to the shell of our stores and/or the larger
shopping centers and/or common areas (which certificate of occupancy is required by local building
codes for us to open our store), causing us in some instances to delay store openings. As the
number of local building codes and local building and fire inspectors to which we and our landlords
are subject increases, we may be increasingly vulnerable to increased construction costs and delays
in store openings caused by our or our landlords’ compliance with local building codes and local
building and fire inspectors’ interpretations of such building codes, which increased construction
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.
18
Our Ulta products and salon services may cause unexpected and undesirable side effects that could
result in their discontinuance or expose us to lawsuits, either of which could result in unexpected
costs and damage to our reputation, which could have a material adverse effect on our business,
financial condition and results of operations.
Unexpected and undesirable side effects caused by our Ulta products for which we have not provided
sufficient label warnings, or salon services which may have been performed negligently, could
result in the discontinuance of sales of our products or of certain salon services or prevent us
from achieving or maintaining market acceptance of the affected products and services. Such side
effects could also expose us to product liability or negligence lawsuits. Any claims brought
against us may exceed our existing or future insurance policy coverage or limits. Any judgment
against us that is in excess of our policy limits would have to be paid from our cash reserves,
which would reduce our capital resources. Further, we may not have sufficient capital resources to
pay a judgment, in which case our creditors could levy against our assets. These events could cause
negative publicity regarding our company, brand or products, which could in turn harm our
reputation and net sales, which could have a material adverse effect on our business, financial
condition and results of operations.
Legal proceedings or third-party claims of intellectual property infringement may require us to
spend 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 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 intellectual property rights of third parties in the United States
and abroad. These third parties could bring claims against us that would cause us to incur
substantial expenses and, if successful, could cause us to pay substantial damages. Further, if a
third party were to bring an intellectual property infringement suit against us, we could be forced
to stop or delay development, manufacturing, or sales of the product that is the subject of the
suit.
As a result of intellectual property infringement claims, or to avoid potential claims, we may
choose to seek, or be required to seek, a license from the third party and would most likely be
required to pay license fees or royalties or both. These licenses may not be available on
acceptable terms, or at all. Ultimately, we could be prevented from commercializing a product or be
forced to cease some aspect of our business operations if, as a result of actual or threatened
intellectual property infringement claims, we are unable to enter into licenses on acceptable
terms. Even if we were able to obtain a license, the rights may be nonexclusive, which would give
our competitors access to the same intellectual property. The inability to enter into licenses
could harm our business significantly.
In addition to infringement claims against us, we may become a party to other patent or trademark
litigation and other proceedings, including interference proceedings declared by the United States
Patent and Trademark Office (USPTO) proceedings before the USPTO’s Trademark Trial and Appeal Board
and opposition proceedings in the European Patent Office, regarding intellectual property rights
with respect to promotional products purchased from third-party vendors or our Ulta branded
products and technology. Some of our competitors may be able to sustain the costs of such
litigation or proceedings better than us because of their substantially greater financial
resources. Uncertainties resulting from the initiation and continuation of intellectual property
litigation or other proceedings could impair our ability to compete in the marketplace.
Intellectual property litigation and other proceedings may also absorb significant management time
and resources, which could have a material adverse effect on our business, financial condition and
results of operations.
Increases in the demand for, or the price of, raw materials used to build and remodel our stores
could hurt our profitability.
The raw materials used to build and remodel our stores are subject to availability constraints and
price volatility caused by weather, supply conditions, government regulations, general economic
conditions and other unpredictable factors. As a retailer engaged in an active building and
remodeling program, we are
particularly vulnerable to increases in construction and remodeling costs. As a result, increases
in the demand for, or the price of, raw materials could hurt our profitability.
Increases in costs of mailing, paper and printing will affect the cost of our catalog and
promotional mailings, which will reduce our profitability.
Postal rate increases and paper and printing costs affect the cost of our catalog and promotional
mailings. In response to any future increases in mailing costs, we may consider reducing the number
and size of certain catalog editions. In addition, we rely on discounts from the basic postal rate
structure, such as discounts for bulk mailings and sorting by zip code and carrier routes. We are
not a party to any long-term contracts for the supply of paper. The cost of paper fluctuates
significantly, and our 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 would reduce our
profitability to the extent that we are unable to pass those increases directly to customers or
offset those increases by raising selling prices or by reducing the number and size of certain
catalog editions.
19
Our secured revolving credit facility contains certain restrictive covenants that could limit our
operational flexibility, including our ability to open stores.
We have a $150 million secured revolving credit facility, or credit facility (expandable under an
accordion option to a maximum of $200 million), with a term expiring May 2011. Substantially all of
our assets are pledged as collateral for outstanding borrowings under the agreement. Outstanding
borrowings bear interest at the prime rate or the Eurodollar rate plus 1.00% up to $100 million and
1.25% thereafter. The credit facility agreement contains usual and customary restrictive covenants
relating to our management and the operation of our business. These covenants, among other things,
restrict our ability to grant liens on our assets, incur additional indebtedness, pay cash
dividends and redeem our stock, enter into transactions with affiliates and merge or consolidate
with another entity. These covenants could restrict our operational flexibility, including our
ability to open stores, and any failure to comply with these covenants or our payment obligations
would limit our ability to borrow under the credit facility and, in certain circumstances, may
allow the lenders thereunder to require repayment.
We will need to raise additional funds to pursue our growth strategy or continue our operations,
and we may be unable to raise capital when needed, which could have a material adverse effect on
our business, financial 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. Based on our current growth
strategy, we expect it will be necessary to exercise the $50 million accordion option of our credit
facility during fiscal 2008. 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 as our belief as to the adequacy of our
available sources of capital could change significantly. Any of these events or circumstances could
result in significant additional funding needs, requiring us to raise additional capital to meet
those needs. If financing is not available on satisfactory terms or at all, we may be unable to
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 and our anticipated growth are likely to place a
considerable strain on our financial and management systems, processes and controls, as well as on
our personnel. In addition, as a public company we are required to document and test our internal
controls over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 so that
our management can periodically certify as to the effectiveness of our internal controls over
financial reporting. Our independent registered public accounting firm will be required to render
an opinion on the effectiveness of our internal controls over financial reporting by the time our
annual report for fiscal 2008 is due and thereafter, which will require us to further document and
make additional changes to our internal controls over financial
reporting. As a result, we have been required to improve our financial and managerial controls,
reporting systems and procedures and have incurred and will continue to incur expenses to test our
systems and to make such improvements. If our management is unable to certify the effectiveness of
our internal controls or if our independent registered public accounting firm cannot render an
opinion on the effectiveness of our internal control over financial reporting, or if material
weaknesses in our internal controls are identified, we could be subject to regulatory scrutiny and
a loss of public confidence, which could have a material adverse effect on our business and our
stock price. In addition, if we do not maintain adequate financial and management personnel,
processes and controls, we may not be able to accurately report our financial performance on a
timely basis, which could cause a decline in our stock price and adversely affect our ability to
raise capital.
We are currently subject to a consolidated securities class action lawsuit, the outcome of which is
uncertain.
We and certain of our current and former executive officers are defendants in a consolidated
securities class action lawsuit in federal court. See Item 3, “Legal Proceedings” for a more
detailed description of these proceedings. This putative class action remains in its preliminary
stages and it is not yet possible to determine the ultimate outcome. The plaintiffs in the class
action lawsuit seek substantial damages. The legal and other 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 price for our common stock may be volatile, and an investor may not be able to sell our
stock at a favorable price or at all.
The market price of our common stock is likely to fluctuate significantly from time to time in
response to factors including:
20
| • | differences between our actual financial and operating results and those expected by investors; | ||
| • | fluctuations in quarterly operating results; | ||
| • | our performance during peak retail seasons such as the holiday season; | ||
| • | market conditions in our industry and the economy as a whole; | ||
| • | changes in the estimates of our operating performance or changes in recommendations by any research analysts that follow our stock or any failure to meet the estimates made by research analysts; | ||
| • | investors’ perceptions of our prospects and the prospects of the beauty products and salon services industries; | ||
| • | the performance of our key vendors; | ||
| • | announcements by us, our vendors or our competitors of significant acquisitions, divestitures, strategic partnerships, joint ventures or capital commitments; | ||
| • | introductions of new products or new pricing policies by us or by our competitors; | ||
| • | recruitment or departure of key personnel; and | ||
| • | the level and quality of securities research analyst coverage for our common stock. |
In addition, public announcements by our competitors, 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.
Our comparable store sales and quarterly financial performance may fluctuate for a variety of
reasons, which could result in a decline in the price of our common stock.
Our comparable store sales and quarterly results of operations have fluctuated in the past, and we
expect them to continue to fluctuate in the future. A variety of other factors affect our
comparable store sales and quarterly financial performance, including:
| • | 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 and other start-up costs; | ||
| • | cannibalization of existing store sales by new store openings; | ||
| • | levels of pre-opening expenses associated with new stores; | ||
| • | timing and effectiveness of our marketing activities, such as catalogs and newspaper inserts; | ||
| • | seasonal fluctuations due to weather conditions; | ||
| • | actions by our existing or new competitors; and | ||
| • | general U.S. economic conditions and, in particular, the retail sales environment. |
Accordingly, our results for any one fiscal quarter are not necessarily indicative of the results
to be expected for any other quarter, and comparable store sales for any particular future period
may decrease. In that event, the price of our common stock would likely decline. For more
information on our quarterly results of operations, see Item 7, “Management’s Discussion and
Analysis of Financial Condition and Results of Operations.”
A significant amount of our total outstanding shares have been restricted from immediate resale,
but may be sold into the market in the near future. The large number of shares eligible for public
sale or subject to rights requiring us to register them for public sale could depress the market
price of our common stock.
The market price of our common stock could decline as a result of sales of a large number of shares
of our common stock in the market and the perception that these sales could occur may also depress
the market price. The holders of a significant amount of our outstanding common stock are
obligated, subject to certain exceptions, not to dispose of or hedge any of their common stock
during
21
the 180-day period following the date of our Prospectus filed with the Securities and
Exchange Commission on October 25, 2007. After the expiration of the lock-up period (on or about
April 21, 2008), a significant amount these shares may be sold in the public market, subject to
prior registration or qualification for an exemption from registration, including, in the case of
shares held by affiliates, compliance with the volume restrictions of Rule 144.
Sales of our common stock as restrictions end or pursuant to registration rights may make it more
difficult for us to sell equity securities in the future at a time and at a price that we deem
appropriate. These sales also could cause our stock price to fall and make it more difficult for
stockholders to sell shares of our common stock.
Our current principal stockholders have significant influence over us and they could delay, deter,
or prevent a change of control or other business combination or otherwise cause us to take action
with which you might not agree.
Our principal stockholders own, in the aggregate, approximately 50% of our outstanding common
stock. As a result, these stockholders will be able to exercise control over all matters requiring
stockholder approval, including the election of directors, amendment of our certificate of
incorporation and approval of significant corporate transactions and will have significant control
over our management and policies. Such concentration of voting power could have the effect of
delaying, deterring, or preventing a change of
control or other business combination that might otherwise be beneficial to our stockholders. In
addition, the significant concentration of share ownership may adversely affect the trading price
of our common stock because investors often perceive disadvantages in owning shares in companies
with controlling stockholders.
Anti-takeover provisions in our organizational documents, stockholder rights agreement and Delaware
law may discourage or prevent a change in control, even if a sale of the Company would be
beneficial to our stockholders, which could cause our stock price to decline and prevent attempts
by our stockholders to replace or remove our current management.
Our amended and restated certificate of incorporation and by-laws contain provisions that may delay
or prevent a change in control, discourage bids at a premium over the market price of our common
stock and harm the market price of our common stock and diminish the voting and other rights of the
holders of our common stock. These provisions 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; | ||
| • | prohibiting our stockholders from calling a special meeting of stockholders; | ||
| • | prohibiting our stockholders from making certain changes to our amended and restated certificate of incorporation or amended and restated bylaws except with a two-thirds majority stockholder approval; and | ||
| • | requiring advance notice for raising business matters or nominating directors at stockholders’ meetings. |
As permitted by our amended and restated certificate of incorporation and by-laws, we have a
stockholder rights agreement, sometimes known as a “poison pill,” which provides for the issuance
of a new series of preferred stock to holders of common stock. In the event of a takeover attempt,
this preferred stock gives rights to holders of common stock other than the acquirer to buy
additional shares of common stock at a discount, leading to the dilution of the acquirer’s stake.
We are also subject to provisions of Delaware law that, in general, prohibit any business
combination with a beneficial owner of 15% or more of our common stock for three years after the
stockholder becomes a 15% stockholder, subject to specified exceptions. Together, these provisions
of our certificate of incorporation, by-laws and stockholder rights agreement and of Delaware law
could make the removal of management more difficult and may discourage transactions that otherwise
could involve payment of a premium over prevailing market prices for our common stock.
| Item 1B. | Unresolved Staff Comments |
None.
22
| Item 2. | Properties |
All of our retail stores, corporate offices and distribution and warehouse facilities are leased or
subleased. Our retail stores are conveniently located in high-traffic, primarily off-mall locations
such as power centers and lifestyle centers with other destination retailers. 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
have a fixed term with options for two or three extension periods of five years each, exercisable
at our option. As of February 2, 2008, we operated 249 retail stores in 31 states, as shown in the
table below:
| Number | ||||
| State | of stores | |||
Alabama |
1 | |||
Arizona |
21 | |||
California |
27 | |||
Colorado |
9 | |||
Delaware |
1 | |||
Florida |
14 | |||
Georgia |
15 | |||
Illinois |
30 | |||
Indiana |
4 | |||
Iowa |
2 | |||
Kansas |
1 | |||
Kentucky |
2 | |||
Maryland |
4 | |||
Massachusetts |
2 | |||
Michigan |
5 | |||
Minnesota |
6 | |||
Nebraska |
1 | |||
Nevada |
5 | |||
New Jersey |
9 | |||
New York |
8 | |||
North Carolina |
9 | |||
Ohio |
3 | |||
Oklahoma |
5 | |||
Oregon |
3 | |||
Pennsylvania |
13 | |||
South Carolina |
3 | |||
Tennessee |
2 | |||
Texas |
31 | |||
Virginia |
7 | |||
Washington |
4 | |||
Wisconsin |
2 | |||
Total |
249 | |||
As of February 2, 2008, we operated one distribution facility located in Romeoville, Illinois. The
Romeoville warehouse contains approximately 317,000 square feet, including an overflow facility.
The lease for the Romeoville warehouse expires on April 30, 2010 and has two renewal options with
terms of five years each. We recently began operating a second distribution facility located in
Phoenix, Arizona. The Phoenix warehouse contains approximately 330,000 square feet. We are currently receiving vendor product at the new facility and expect to begin shipping
to our Phoenix, Arizona stores beginning in late April 2008.
Our corporate offices are located in two separate locations. In February 2008, we relocated our
principal executive office from Romeoville, Illinois to Bolingbrook, Illinois. Our secondary
corporate office continues to be located in Romeoville, Illinois on the site of the Romeoville
warehouse. The lease for the Bolingbrook office expires on August 31, 2018 and the lease for the
Romeoville office expires on April 30, 2010. We have secured additional office space in
Bolingbrook, Illinois for corporate use to accommodate future human 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 Court for the Northern District of Illinois. Each suit alleges that the
prospectus and registration statement filed pursuant to the Company’s initial public offering
contained materially false and misleading statements and failed to disclose material facts. Each
suit claims violations of Sections 11, 12(a)(2) and/or 15 of the Securities Act of 1933, and the
two later filed suits added claims under Sections 10(b) and 20(a) of the Securities Exchange Act of
1934, as well as the associated Rule 10b-5. In February 2008, two of the plaintiffs filed competing
motions to consolidate the actions and appoint lead plaintiffs and lead plaintiffs’
counsel. On March 18, 2008, after one of the plaintiffs withdrew his motion, the suits were
consolidated and plaintiffs in the Mirsky v. ULTA action were appointed lead plaintiffs. Lead
plaintiffs have until May 19, 2008 to file an amended consolidated class action complaint.
Although we believe that we have meritorious defenses to the claims made in the consolidated class
action and intend to contest the lawsuit vigorously, an adverse resolution may have a material
adverse effect on our financial position and results of operations in the period in which the
lawsuit is resolved. We are not presently able to reasonably estimate potential losses, if any,
related to the lawsuit.
23
General litigation — We are also involved in various legal proceedings that are incidental to the
conduct of our business, including, but not limited to, employment related claims. In the opinion
of management, the amount of any liability with respect to these proceedings, either individually
or in the aggregate, will not be material.
| Item 4. | Submission of Matters to a Vote of Security Holders |
None.
Part II
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Market Information
Our common stock 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
since October 25, 2007:
| Fiscal Year 2007 | High | Low | ||||||
Third quarter |
$ | 35.63 | $ | 28.89 | ||||
Fourth quarter |
$ | 32.25 | $ | 11.78 | ||||
Holders of the Registrant’s Common Stock
The last reported sale price of our common stock on the NASDAQ Global Select Market on April 10,
2008 was $14.91 per share. As of April 10, 2008, we had 312 holders of record of our common stock.
Because many shares of common stock are held by brokers and other institutions on behalf of
stockholders, we are unable to estimate the total number of stockholders represented by these
record holders.
Dividends
No cash dividends have been declared on our common stock to date nor have any decisions been made
to pay a dividend in the foreseeable future. We evaluate our dividend policy on a periodic basis.
Any dividend we might declare in the future would be subject to the applicable provisions of our
credit agreement, which currently restricts our ability to pay cash dividends.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
Sales of Unregistered Securities
During the period from August 5, 2007 to November 1, 2007 we issued 99,501 shares of common stock
to employees for an aggregate amount of $0.2 million in connection with the exercise of stock
options granted
under our 2002 Equity Incentive Plan and Second Amended and Restate Restricted Stock Option Plan.
These securities were issued pursuant to employee benefit plans, in transactions exempt from the
registration requirements of the Securities Act in reliance upon Rule 701 of the Securities Act.
There were no underwriting discounts or commissions applicable to these transactions.
24
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 plans as of February 2, 2008.
| Number of securities | Number of securities | |||||||||||
| to be issued upon | Weighted-average | remaining available | ||||||||||
| exercise of | exercise price of | for future issuance | ||||||||||
| outstanding options, | outstanding options, | under equity | ||||||||||
| Plan category | warrants and rights | warrants and rights | compensation plans | |||||||||
Equity compensation plans
approved by security
holders |
4,643,634 | $ | 7.35 | 4,528,920 | ||||||||
Equity compensation
plans not
approved by security
holders |
— | — | — | |||||||||
Total |
4,643,634 | $ | 7.35 | 4,528,920 | ||||||||
During March 2008, the Compensation Committee of the board of directors approved additional option
grants of 1,080,560.
Stock Performance Graph
The following performance graph and related information shall not be deemed “soliciting material”
or to be “filed” with the Securities and Exchange Commission, nor shall such information be
incorporated by reference into any future filing under the Securities Act of 1933 or Securities
Exchange Act of 1934, each as amended, except to the extent that we specifically incorporate it by
reference into such filing.
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 Ulta’s initial public offering on October 25, 2007 through the end of Ulta’s fiscal
year ended February 2, 2008. The graph assumes an investment of $100 made at the closing of trading
on October 25, 2007, in (i) Ulta’s common stock, (ii) the stocks comprising the NQGS, and (iii)
stocks comprising the RLX. All values assume reinvestment of the full amount of all dividends, if
any, into additional shares of the same class of equity securities at the frequency with which
dividends are paid on such securities during the applicable time period.
25
| Item 6. | Selected Financial Data |
The following table presents our selected financial data. The table should be read in conjunction
with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” and Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on
Form 10-K.
| Fiscal year ended(1) | ||||||||||||||||||||
| (In thousands, except per share | February 2, | February 3, | January 28, | January 29, | January 31, | |||||||||||||||
| and per square foot data) | 2008 | 2007 | 2006 | 2005 | 2004 | |||||||||||||||
Consolidated income statement: |
||||||||||||||||||||
Net sales(2) |
$ | 912,141 | $ | 755,113 | $ | 579,075 | $ | 491,152 | $ | 423,863 | ||||||||||
Cost of sales |
628,495 | 519,929 | 404,794 | 346,585 | 312,203 | |||||||||||||||
Gross profit |
283,646 | 235,184 | 174,281 | 144,567 | 111,660 | |||||||||||||||
Selling, general and administrative expenses |
225,167 | 188,000 | 140,145 | 121,999 | 98,446 | |||||||||||||||
Pre-opening expenses |
11,758 | 7,096 | 4,712 | 4,072 | 2,318 | |||||||||||||||
Operating income |
46,721 | 40,088 | 29,424 | 18,496 | 10,896 | |||||||||||||||
Interest expense |
4,542 | 3,314 | 2,951 | 2,835 | 2,789 | |||||||||||||||
Income before income taxes |
42,179 | 36,774 | 26,473 | 15,661 | 8,107 | |||||||||||||||
Income tax expense |
16,844 | 14,231 | 10,504 | 6,201 | 3,023 | |||||||||||||||
Net income |
$ | 25,335 | $ | 22,543 | $ | 15,969 | $ | 9,460 | $ | 5,084 | ||||||||||
Net income per common share: |
||||||||||||||||||||
Basic |
$ | 0.69 | $ | 1.38 | $ | 0.74 | $ | (0.70 | ) | $ | (2.36 | ) | ||||||||
Diluted |
$ | 0.48 | $ | 0.45 | $ | 0.33 | $ | (0.70 | ) | $ | (2.36 | ) | ||||||||
Weighted average common shares outstanding: |
||||||||||||||||||||
Basic |
20,383 | 5,771 | 4,094 | 3,181 | 2,331 | |||||||||||||||
Diluted |
53,293 | 49,921 | 48,196 | 3,181 | 2,331 | |||||||||||||||
Other operating data: |
||||||||||||||||||||
Comparable store sales increase(3) |
6.4 | % | 14.5 | % | 8.3 | % | 8.0 | % | 6.2 | % | ||||||||||
Number of stores end of year |
249 | 196 | 167 | 142 | 126 | |||||||||||||||
Total square footage end of year |
2,589,244 | 2,023,305 | 1,726,563 | 1,464,330 | 1,285,857 | |||||||||||||||
Total square footage per store(4) |
10,399 | 10,323 | 10,339 | 10,312 | 10,205 | |||||||||||||||
Average total square footage(5) |
2,283,935 | 1,857,885 | 1,582,935 | 1,374,005 | 1,216,777 | |||||||||||||||
Net sales per average total square foot(6) |
$ | 399 | $ | 398 | $ | 366 | $ | 357 | $ | 348 | ||||||||||
Capital expenditures |
101,866 | 62,331 | 41,607 | 34,807 | 30,354 | |||||||||||||||
Depreciation and amortization |
39,503 | 29,736 | 22,285 | 18,304 | 15,411 | |||||||||||||||
Consolidated balance sheet data: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 3,789 | $ | 3,645 | $ | 2,839 | $ | 3,004 | $ | 3,178 | ||||||||||
Working capital |
117,039 | 88,105 | 76,473 | 69,955 | 60,751 | |||||||||||||||
Property and equipment, net |
236,389 | 162,080 | 133,003 | 114,912 | 99,577 | |||||||||||||||
Total assets |
469,413 | 338,597 | 282,615 | 253,425 | 206,420 | |||||||||||||||
Total debt(7) |
74,770 | 55,529 | 50,173 | 47,008 | 42,906 | |||||||||||||||
Total stockholders’ equity |
211,503 | 148,760 | 123,015 | 105,308 | 92,778 | |||||||||||||||
| (1) | Our fiscal year-end is the Saturday closest to January 31 based on a 52/53-week year. Each fiscal year consists of four 13-week quarters, with an extra week added onto the fourth quarter every five or six years. | |
| (2) | Fiscal 2006 was a 53-week operating year and the 53rd week represented approximately $16.4 million in net sales. | |
26
| (3) | Comparable store sales increase reflects sales for stores beginning on the first day of the 14th month of operation. Remodeled stores are included in comparable store 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. | |
| (5) | Average total square footage represents a weighted average which reflects the effect of opening stores in different months throughout the year. | |
| (6) | 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. Fiscal 2006 net sales per average total square foot were adjusted to exclude the net sales effect of the 53rd week. | |
| (7) | Total debt includes approximately $4.8 million related to the Series III preferred stock, which is presented between the liabilities section and the equity section of our consolidated balance sheet for all years prior to February 2, 2008. |
27
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should
be read in conjunction with our consolidated financial statements and related notes included
elsewhere in this Form 10-K. This discussion contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including those discussed in the section
entitled “Risk Factors” in this Form 10-K.
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements, which may be identified by the
use of words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,”
“outlook,” and other words and terms of similar meaning. Such statements reflect our current view
with respect to future events and are subject to certain risks, uncertainties and assumptions. A
variety of factors could cause our future results to differ materially from the anticipated results
expressed in such forward-looking statements. Readers should review Item 1A, “Risk Factors,” of
this Annual Report on Form 10-K for a description of important factors that could cause future
results to differ materially from those contemplated by the forward-looking statements made in this
Annual Report on Form 10-K. In addition, general economic conditions, acquisitions and development
of new businesses, product availability, sales volumes, promotional activity of our competitors,
profit margins, weather, foreign currency fluctuation, availability of suitable real estate
locations, our ability to react to a disaster recovery situation, and the impact of labor markets
and new product introductions on our overall profitability, among other things, could cause our
future results to differ materially from those projected in any such forward-looking statements. We
undertake no obligation to update any forward-looking statements to reflect events or circumstances
after the date of such statements.
Overview
We were founded in 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 today. We pioneered what we believe to be our unique combination of
beauty superstore and specialty store attributes. We believe our strategy provides us with the
competitive advantages that have contributed to our strong financial performance.
We are currently the largest beauty retailer that provides one-stop shopping for prestige, mass and
salon products and salon services in the United States. We combine the unique elements of a beauty
superstore with the distinctive environment 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
21,000 beauty products across the categories of cosmetics, fragrance, haircare, skincare, bath and
body products and salon styling tools, as well as salon haircare products. We focus on delivering a
compelling value proposition to our customers across all of our product categories. Our stores are
conveniently located in high-traffic, primarily off-mall locations such as power centers and
lifestyle centers with other destination retailers. As of February 2, 2008, we operated 249 stores
across 31 states. In addition to these fundamental elements of a beauty superstore, we strive to
offer an uplifting shopping experience through what we refer to as “The Four E’s”: Escape,
Education, Entertainment and Esthetics.
The continued growth of our business and any future increases in net sales, net income and cash
flows is dependent on our ability to execute our growth strategy, including growing our store base,
expanding our prestige brand offerings, driving incremental salon traffic, expanding our online
business and continuing to enhance our brand awareness. We believe that the steadily expanding U.S.
beauty products and 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 sales is a key metric that is monitored closely within the retail industry. We do
not expect our future comparable store sales increases to reflect the levels experienced in prior
periods. This is due in part to the difficulty in improving on such significant increases in
subsequent periods.
The Company adopted a structured stock option compensation program in July 2007. The award of stock
options under this program will result in increased stock-based compensation expense in future
periods as compared to the expense reflected in our historical financial statements.
Over the long-term, our growth strategy is to increase total net sales through increases in our
comparable store sales and by opening new stores. Gross profit as a percentage of net sales is
expected to be relatively consistent with historical rates given our planned
28
distribution infrastructure investments and the impact of the rate of new store growth. We plan to
continue to improve our operating results by leveraging our fixed costs and decreasing our selling,
general and administrative expenses, as a percentage of our net sales.
On October 30, 2007, we completed an initial public offering in which we sold 7,666,667 shares of
common stock resulting in net proceeds of $123.6 million after deducting underwriting discounts and
commissions and offering expenses. Selling stockholders sold 2,153,928 additional shares of common
stock. We did not receive any proceeds from the sale of shares by the selling stockholders. We used
the net proceeds from the offering to pay $93.0 million of accumulated dividends in arrears on our
preferred stock, which satisfied all amounts due with respect to accumulated dividends, $4.8
million to redeem our Series III preferred stock, and $25.8 million to reduce our borrowings under
our third amended and restated loan and security agreement and for general corporate purposes. Also
in connection with the offering, we converted preferred shares into 41,524,002 common shares and
restated the par value of our common stock to $0.01 per share.
Basis of presentation
Net sales include store and e-commerce merchandise sales as well as salon service revenue. Salon
service revenue represents less than 10% of our combined product sales and services revenues and
therefore, these revenues are combined with product sales. We recognize merchandise revenue at the
point of sale (POS) in our 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 other incentives are recorded as a reduction of net sales.
Comparable store sales reflect sales for stores beginning on the first day of the 14th month of
operation. Therefore, a store is included in our comparable store base on the first day of the
period after one year of operations plus the initial one month grand opening period. Non-comparable
store sales include sales from new stores that have not yet completed their 13th month of operation
and stores that were closed for part or all of the period in either year as a result of remodel
activity. Remodeled stores are included in comparable store sales unless the store was closed for a
portion of the current or prior period. There may be variations in the way in which some of our
competitors and other retailers calculate comparable or same store sales. As a result, data herein
regarding our comparable store sales may not be comparable to similar data made available by our
competitors or other retailers.
Comparable store sales is a critical measure that allows us to evaluate the performance of our
store base as well as several other aspects of our overall strategy. Several factors could
positively or negatively impact our comparable store sales results:
| • | 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 of our various marketing activities; and | ||
| • | the number of new stores opened and the impact on the average age of all of our comparable stores. |
Cost of sales includes:
| • | the cost of merchandise sold, including all vendor allowances, which are treated as a reduction of merchandise costs; | ||
| • | warehousing and distribution costs including labor and related benefits, freight, rent, depreciation and amortization, real estate taxes, utilities, and insurance; | ||
| • | store occupancy costs including rent, depreciation and amortization, real estate taxes, utilities, repairs and maintenance, insurance, licenses, and cleaning expenses; | ||
| • | salon payroll and benefits; and | ||
| • | shrink and inventory valuation reserves. |
29
Our cost of sales may be negatively impacted as we open an increasing number of stores. We also
expect that cost of sales as a percentage of net sales will be negatively impacted in the next
several years as a result of accelerated depreciation related to our store remodel program. The
program was adopted in third quarter fiscal 2006. We have accelerated depreciation expense on
assets to be disposed of during the remodel process such that those assets will be fully
depreciated at the time of the planned remodel. Changes in our merchandise mix may also have an
impact on cost of sales.
This presentation of items included in cost of sales may not be comparable to the way in which our
competitors or other retailers compute their cost of sales.
Selling, general and administrative expenses include:
| • | 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 compliance expenses; | ||
| • | stock-based compensation expense related to option grants which will result in increases in expense as we implemented a structured stock option compensation program in 2007; | ||
| • | depreciation and amortization for all assets except those related to our retail and warehouse operations, which is included in cost of sales; and | ||
| • | legal, finance, information systems and other corporate overhead costs. |
This presentation of items in selling, general and administrative expenses may not be comparable to
the way in which our competitors or other retailers compute their selling, general and
administrative expenses.
Pre-opening expense includes non-capital expenditures during the period prior to store opening for
new and remodeled stores including store set-up labor, management and employee training, and grand
opening advertising. Pre-opening expenses also includes rent during the construction period related
to new stores.
Interest expense includes interest costs associated with our credit facility, which is structured
as an asset based lending instrument. Our interest expense will fluctuate based on the seasonal
borrowing requirements associated with acquiring inventory in advance of key holiday selling
periods and fluctuation in the variable interest rates we are charged on outstanding balances. Our
credit facility is used to fund seasonal inventory needs and new and remodel store capital
requirements in excess of our cash flow from operations. Our credit facility interest is based on a
variable interest rate structure which can result in increased cost in periods of rising interest
rates.
Income tax expense reflects the federal statutory tax rate and the weighted average state statutory
tax rate for the states in which we operate stores.
30
Results of operations
Our fiscal years are the 52 or 53 week periods ending on the Saturday closest to January 31. The
Company’s fiscal years ended February 2, 2008, February 3, 2007 and January 28, 2006 were 52, 53
and 52 week years, respectively, and are hereafter referred to as fiscal 2007, fiscal 2006 and
fiscal 2005.
The following tables present the components of our results of operations for the periods indicated:
| Fiscal year ended | ||||||||||||
| February 2, | February 3, | January 28, | ||||||||||
| (In thousands) | 2008 | 2007 | 2006 | |||||||||
Net sales |
$ | 912,141 | $ | 755,113 | $ | 579,075 | ||||||
Cost of sales |
628,495 | 519,929 | 404,794 | |||||||||
Gross profit |
283,646 | 235,184 | 174,281 | |||||||||
Selling, general and administrative expenses |
225,167 | 188,000 | 140,145 | |||||||||
Pre-opening expenses |
11,758 | 7,096 | 4,712 | |||||||||
Operating income |
46,721 | 40,088 | 29,424 | |||||||||
Interest expense |
4,542 | 3,314 | 2,951 | |||||||||
Income before income taxes |
42,179 | 36,774 | 26,473 | |||||||||
Income tax expense |
16,844 | 14,231 | 10,504 | |||||||||
Net income |
$ | 25,335 | $ | 22,543 | $ | 15,969 | ||||||
Other operating data: |
||||||||||||
Number stores end of period |
249 | 196 | 167 | |||||||||
Comparable store sales increase |
6.4 | % | 14.5 | % | 8.3 | % | ||||||
| Fiscal year ended | ||||||||||||
| February 2, | February 3, | January 28, | ||||||||||
| (Percentage of net sales) | 2008 | 2007 | 2006 | |||||||||
Net sales |
100.0 | % | 100.0 | % | 100.0 | % | ||||||
Cost of sales |
68.9 | % | 68.9 | % | 69.9 | % | ||||||
Gross profit |
31.1 | % | 31.1 | % | 30.1 | % | ||||||
Selling, general and adminstrative expenses |
24.7 | % | 24.9 | % | 24.2 | % | ||||||
Pre-opening expenses |
1.3 | % | 0.9 | % | 0.8 | % | ||||||
Operating income |
5.1 | % | 5.3 | % | 5.1 | % | ||||||
Interest expense |
0.5 | % | 0.4 | % | 0.5 | % | ||||||
Income before income taxes |
4.6 | % | 4.9 | % | 4.6 | % | ||||||
Income tax expense |
1.8 | % | 1.9 | % | 1.8 | % | ||||||
Net income |
2.8 | % | 3.0 | % | 2.8 | % | ||||||
31
Fiscal year 2007 versus fiscal year 2006
Net sales
Net sales increased $157.0 million, or 20.8%, to $912.1 million in fiscal 2007 compared to $755.1
million in fiscal 2006. Fiscal 2006 was a 53-week operating year and the 53rd week represented
approximately $16.4 million in net sales. Adjusted for the 53rd week, fiscal 2007 net sales
increased $173.4 million, or 23.5% compared to fiscal 2006. This increase is due to the opening of
53 new stores in 2007 and a 6.4% increase in comparable store sales. Non-comparable stores, which
include stores opened in fiscal 2007 as well as stores opened in fiscal 2006 which have not yet
turned comparable, contributed $127.9 million of the net sales increase while comparable stores
contributed $45.5 million of the 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-digit growth in our prestige cosmetics category consistent
with our growth strategy.
Gross profit
Gross profit increased $48.4 million, or 20.6%, to $283.6 million in fiscal 2007, compared to
$235.2 million, in fiscal 2006. Gross profit as a percentage of net sales was 31.1% in fiscal 2007
and fiscal 2006. Gross profit in fiscal 2007 was impacted by:
| • | an increase of $157.0 million in net sales from new stores and comparable sales growth; | ||
| • | a 30 basis point decrease due to warehouse management software-related inefficiencies during the first half of fiscal 2007; and | ||
| • | a 20 basis point increase due to increased vendor co-op monies on increased advertising compared to the prior year. |
Selling, general and administrative expenses
Selling, general and administrative expenses increased $37.2 million, or 19.8%, to $225.2 million
in fiscal 2007 compared to $188.0 million in fiscal 2006. As a percentage of net sales, selling,
general and administrative expenses decreased 20 basis points to 24.7% for fiscal 2007 compared to
24.9% in fiscal 2006. This decrease in the selling, general and administrative percentage resulted
from:
| • | operating expenses from new stores opened in fiscal 2007 and fiscal 2006; | ||
| • | 20 basis point decrease in stock compensation expense representing the net effects of new 2007 stock option grants and the non-recurring stock compensation charge of $2.8 million in fiscal 2006; | ||
| • | a 40 basis point increase in marketing expense driven by increased number of advertising vehicles and circulation to drive customer traffic mainly during the fourth quarter of fiscal 2007; and | ||
| • | the remainder is primarily attributed to improved leverage in corporate overhead and store payroll on higher sales compared to the prior year. |
Pre-opening expenses
Pre-opening expenses increased $4.7 million, or 65.7%, to $11.8 million in fiscal 2007 compared to
$7.1 million in fiscal 2006. During fiscal 2007, we opened 53 new stores and remodeled 17 stores.
During fiscal 2006, we opened 31 new stores and remodeled 7 stores.
Interest expense
Interest expense increased $1.2 million, or 37.1%, to $4.5 million in fiscal 2007 compared to $3.3
million in fiscal 2006 primarily due to a $27.0 million increase in the average debt outstanding on
our variable rate credit facility during fiscal 2007.
Income tax expense
Income tax expense of $16.8 million in fiscal 2007 represents an effective tax rate of 39.9%,
compared to fiscal 2006 tax expense of $14.2 million which represents an effective tax rate of
38.7%. The increase in the effective tax rate is primarily due to an adjustment in fiscal 2006 to
reflect the benefit of state tax effects of our net operating loss carry forwards.
Net income
Net income increased $2.8 million, or 12.4%, to $25.3 million in fiscal 2007 compared to $22.5
million in fiscal 2006. The increase in net income of $2.8 million resulted from an increase in
gross profit of $48.4 million driven by a comparable store sales increase of 6.4%. The increase in
gross profit was partially offset by a $37.2 million increase in selling, general and
administrative expenses and a $4.7 million increase in pre-opening expenses.
32
Fiscal year 2006 versus fiscal year 2005
Net sales
Net sales increased $176.0 million, or 30.4%, to $755.1 million in fiscal 2006 compared to $579.1
million in fiscal 2005. Fiscal 2006 was a 53-week operating year and the 53rd week represented
approximately $16.4 million in net sales. Adjusted for the 53rd week, fiscal 2006 net sales
increased $159.6 million, or 27.6% compared to fiscal 2005. This increase is due to the opening of
31 new stores in 2006, two store closures, and a 14.5% increase in comparable store sales.
Non-comparable stores, which include stores opened in fiscal 2006 as well as stores opened in
fiscal 2005 which have not yet turned comparable, contributed $77.3 million of the net sales
increase while comparable stores contributed $82.3 million of the total net sales increase. Our
comparable store sales growth in fiscal 2006 was driven by strong performance of existing and new
brands. We introduced several new fragrance brands in the first half of the year which resulted in
increased customer traffic and growth in average transaction value.
Gross profit
Gross profit increased $60.9 million, or 34.9%, to $235.2 million in fiscal 2006, compared to
$174.3 million, in fiscal 2005. Gross profit as a percentage of net sales increased 100 basis
points to 31.1% in fiscal 2006 from 30.1% in fiscal 2005. The increase in gross profit resulted
from:
| • | an increase of $176.0 million in net sales from new stores and comparable sales growth; | ||
| • | a 60 basis point improvement in salon payroll and benefits driven by improved salon stylist productivity resulting from a continued focus on training programs and other strategic initiatives; | ||
| • | a 50 basis point decrease due to $3.5 million of planned accelerated depreciation related to our store remodel program; | ||
| • | a 30 basis point improvement resulting from a reduction in merchandise shrink as a result of continued focus and improvement in overall store and supply chain inventory controls and specific in-store initiatives targeted at controlling merchandise loss, and improvement in our distribution and supply chain costs as we focus on increasing the efficiency of these operations and leverage the growth in our store base; and | ||
| • | a 30 basis point improvement in leverage of store occupancy costs as a result of comparable store sales growth. |
Selling, general and administrative expenses
Selling, general and administrative expenses increased $47.9 million, or 34.2%, to $188.0 million
in fiscal 2006 compared to $140.1 million in fiscal 2005. As a percentage of net sales, selling,
general and administrative expenses increased 70 basis points to 24.9% for fiscal 2006 compared to
24.2% in fiscal 2005. This increase in the selling, general and administrative percentage resulted
from:
| • | operating expenses from new stores opened in fiscal 2006 and fiscal 2005; | ||
| • | a non-recurring stock compensation charge of $2.8 million, or 40 basis points, primarily related to a former executive of the Company; | ||
| • | $0.7 million of share-based compensation expense related to our adoption of Statement of Financial Accounting Standards (SFAS) 123R in fiscal 2006 which increased selling, general and administrative expenses by 10 basis points; and | ||
| • | $0.6 million of incremental asset write-offs related to closed or remodeled stores representing 10 basis points. |
Pre-opening expenses
Pre-opening expenses increased $2.4 million, or 50.6%, to $7.1 million in fiscal 2006 compared to
$4.7 million in fiscal 2005. During fiscal 2006, we opened 31 new stores and remodeled 7 stores.
During fiscal 2005, we opened 25 new stores and remodeled 1 store.
Interest expense
Interest expense increased $0.3 million, or 12.3%, to $3.3 million in fiscal 2006 compared to $3.0
million in fiscal 2005 primarily due to an increase in the interest rates on our variable rate
credit facility.
Income tax expense
Income tax expense of $14.2 million in fiscal 2006 represents an effective tax rate of 38.7%,
compared to fiscal 2005 tax expense of $10.5 million which represents an effective tax rate of
39.7%. The decrease in the effective tax rate is primarily due to an adjustment to reflect the
state tax effects of our net operating loss carry forwards.
Net income
Net income increased $6.5 million, or 41.2%, to $22.5 million in fiscal 2006 compared to $16.0
million in fiscal 2005. The after-tax impact of the non-recurring stock compensation charge was
approximately $1.7 million. The increase in net income of $6.5 million
33
resulted from an increase in gross profit of $60.9 million driven by a comparable store sales
increase of 14.5% and a 100 basis point increase in gross profit as a percentage of sales. The
increase in gross profit was partially offset by a $47.9 million (including the $2.8 million
non-recurring stock compensation charge) increase in selling, general and administrative expenses
related to operating costs for new stores opened in fiscal 2005 and fiscal 2006 as well as costs
incurred to support the infrastructure necessary to manage current and future store growth.
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, expansion of our headquarters, a new
second distribution facility, and for continued improvement in our information technology systems.
Our primary sources of liquidity are cash flows from operations, changes in working capital, and
borrowings under our credit facility. The most significant component of our working capital 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 vendors.
Our working capital needs are greatest from August through November each year as a result of our
inventory build-up during this period for the approaching holiday season. This is also the time of
year when we are at maximum investment levels in our new store class and have not yet collected
landlord allowances due us as part of our lease agreements. Based on past performance and current
expectations, we believe that cash generated from operations and borrowings under the credit
facility, with the accordion option exercised, will satisfy the Company’s working capital needs,
capital expenditure needs, commitments, and other liquidity requirements through at least the next
12 months.
Merchandise inventories were $176.1 million at February 2, 2008, an increase of $46.9 million
compared to the prior year end. Approximately $40.9 million of the increase resulted from the
addition of 53 new stores opened since the end of fiscal 2006. The remaining increase is related
to inventory for 14 new stores that will open in the first quarter of fiscal 2008. Average
inventory per store increased approximately 3.6% compared to fiscal 2006.
On October 30, 2007, we completed an initial public offering in which we sold 7,666,667 shares of
common stock to the public at a price of $18.00 per share resulting in aggregate gross proceeds
from the sale of shares of common stock of $138.0 million. Selling stockholders sold 2,153,928
additional shares of common stock. We did not receive any proceeds from the sale of shares by the
selling stockholders. The aggregate net proceeds to us were $123.6 million after deducting $9.7
million in underwriting discounts and commissions and $4.7 million in offering expenses. We used
the net proceeds from the offering to pay $93.0 million of accumulated dividends in arrears on our
preferred stock, which satisfied all amounts due with respect to accumulated dividends, $4.8
million to redeem our Series III preferred stock, and $25.8 million to reduce our borrowings under
our third amended and restated loan and security agreement and for general corporate purposes. Also
in connection with the offering, we converted preferred shares into 41,524,002 common shares and
restated the par value of our common stock to $0.01 per share.
Credit facility
Our credit facility is with LaSalle Bank National Association as the administrative agent, Wachovia
Capital Finance Corporation as collateral agent, and JP Morgan Chase Bank as documentation agent.
This facility provides maximum credit of $150 million and a $50 million accordion option through
May 31, 2011. The credit facility agreement contains a restrictive financial covenant on tangible
net worth. Substantially all of our assets are pledged as collateral for outstanding borrowings
under the facility. Outstanding borrowings bear interest at the prime rate or the Eurodollar rate
plus 1.00% up to $100 million and 1.25% thereafter. The advance rates on owned inventory are 80%
(85% from September 1 to January 31).
The interest rate on the outstanding balances under the facility as of February 2, 2008 and
February 3, 2007 was 4.812% and 7.025%, respectively. We had approximately $73.1 million and $48.9
million of availability as of February 2, 2008 and February 3, 2007, respectively, excluding the
accordion option. We also have an ongoing letter of credit that renews annually which had a
balance of $0.3 million as of February 2, 2008 and February 3, 2007.
34
Operating activities
Operating activities consist of net income adjusted for certain non-cash items, including
depreciation and amortization, non-cash stock-based compensation, excess tax benefits from
stock-based compensation, realized losses on disposal of property and equipment, and the effect of
working capital changes.
| Fiscal year ended | ||||||||||||
| February 2, | February 3, | January 28, | ||||||||||
| (In thousands) | 2008 | 2007 | 2006 | |||||||||
Net income |
$ | 25,335 | $ | 22,543 | $ | 15,969 | ||||||
Items not affecting cash: |
||||||||||||
Depreciation and amoritzation |
39,503 | 29,736 | 22,285 | |||||||||
Deferred income taxes |
(3,284 | ) | (3,080 | ) | (3,037 | ) | ||||||
Non-cash stock compensation charges |
2,283 | 983 | 468 | |||||||||
Excess tax benefits from stock-based compensation |
(1,575 | ) | (5,360 | ) | (213 | ) | ||||||
Loss on disposal of property and equipment |
195 | 3,518 | 1,230 | |||||||||
Changes in working capital items |
(15,551 | ) | 7,290 | 899 | ||||||||
Net cash provided by operations |
$ | 46,906 | $ | 55,630 | $ | 37,601 | ||||||
The decrease in net cash from operating activities of $8.7 million in fiscal 2007 compared to
fiscal 2006 is primarily attributed to the following:
| • | a decrease of $22.8 million in net working capital changes mainly attributed to a combination of an increase in merchandise inventories ($27.0 million), an increase in deferred rent related to new store lease terms ($11.0 million), a decrease in accrued liabilities ($4.6 million), and an increase in prepaid and other assets ($3.1 million); and | ||
| • | an increase in depreciation and amortization of $9.8 million attributed to new stores opened in fiscal 2007 and fiscal 2006 and accelerated depreciation related to our remodel program. |
The increase in net cash from operating activities of $18.0 million in fiscal 2006 compared to
fiscal 2005 is primarily attributed to the following:
| • | an increase in net income of $6.6 million; | ||
| • | an increase in depreciation and amortization of $7.5 million attributed to new stores opened in fiscal 2006 and fiscal 2005 and accelerated depreciation related to our remodel program; | ||
| • | an increase of $6.4 million in net working capital changes mainly attributed to a combination of increases in deferred rent related to new store lease terms ($2.8 million), an increase in accrued liabilities ($4.0 million), a decrease in prepaid and other assets ($2.1 million), and an increase in landlord allowances receivable related to additional new stores opened in fiscal 2006 ($2.5 million); | ||
| • | a decrease of $5.1 million related to increased volume of excess tax benefits recognized from stock-based compensation; and | ||
| • | an increase of $2.3 million on loss on disposal of property and equipment representing write-offs of remodel store assets and other store fixtures. |
35
Investing activities
Investing activities consist primarily of capital expenditures for new and remodeled stores as well
as investments in information technology systems.
| Fiscal year ended | ||||||||||||
| February 2, | February 3, | January 28, | ||||||||||
| (In thousands) | 2008 | 2007 | 2006 | |||||||||
Purchases of property and equipment, net |
$ | (101,866 | ) | $ | (62,331 | ) | $ | (41,607 | ) | |||
Receipt of related party notes receivable |
4,467 | — | — | |||||||||
Issuance of related party notes receivable |
— | (2,414 | ) | — | ||||||||
Net cash used in investing activities |
$ | (97,399 | ) | $ | (64,745 | ) | $ | (41,607 | ) | |||
During fiscal 2006, our Chief Executive Officer exercised stock options in exchange for a
promissory note for $4.1 million. The Company withheld $2.4 million of payroll-related taxes in
connection with the exercised options and that portion of the note has been classified as an
investing activity. The remainder of the promissory note of $1.7 million related to exercise
proceeds of the options and was classified as a non-cash financing activity. The note was paid in
full on June 29, 2007. All of the related party notes receivable were settled during fiscal 2007.
Financing activities
Financing activities consist principally of draws and payments on our credit facility and capital
stock transactions.
| Fiscal year ended | ||||||||||||
| February 2, | February 3, | January 28, | ||||||||||
| (In thousands) | 2008 | 2007 | 2006 | |||||||||
Proceeds on long-term borrowings |
$ | 1,094,590 | $ | 851,468 | $ | 644,817 | ||||||
Payments on long-term borrowings |
(1,070,557 | ) | (846,112 | ) | (641,652 | ) | ||||||
Proceeds from issuance of common stock in initial
public offering, net of issuance costs |
123,608 | — | — | |||||||||
Payment of accumulated dividends in arrears |
(93,012 | ) | — | — | ||||||||
Redemption of Series III preferred stock |
(4,792 | ) | — | — | ||||||||
Purchase of treasury stock |
(1,950 | ) | (2,217 | ) | — | |||||||
Excess tax benefits from stock-based compensation |
1,575 | 5,360 | 213 | |||||||||
Proceeds from issuance of common stock under
stock plans |
1,175 | 1,422 | 615 | |||||||||
Principal payments under capital lease obligations |
— | — | (167 | ) | ||||||||
Proceeds from issuance of preferred stock |
— | — | 15 | |||||||||
Net cash provided by financing activities |
$ | 50,637 | $ | 9,921 | $ | 3,841 | ||||||
The increase in net cash provided by financing activities of $40.7 million in fiscal 2007 is
primarily the result of net proceeds of $123.6 million obtained in our initial public offering to
pay $93.0 million of accumulated dividends in arrears on our preferred stock, $4.8 million to
redeem our Series III preferred stocks, and $25.8 million to reduce our borrowings under our third
amended and restated loan and security agreement and for general corporate purposes. In addition,
the net increase of $18.7 million in long-term borrowings was attributable to the increase in
merchandise inventories and new store capital expenditures as a result of the increase in new store
openings.
The increase in net cash provided by financing activities of $6.1 million in fiscal 2006 is due to
the $5.1 million increase in excess tax benefits from stock-based compensation, $0.8 million
increase in proceeds recognized by the Company resulting from the exercise of stock options by
employees, net of a $2.2 million outflow related to a treasury stock transaction with an investor.
36
Seasonality
Our business is subject to seasonal fluctuation. Significant portions of our net sales and profits
are realized during the fourth quarter of the fiscal year due to the holiday selling season. To a
lesser extent, our business is also affected by Mothers’ Day as well as the “Back to School” season
and Valentines’ Day. Any decrease in sales during these higher sales volume periods could have an
adverse effect on our business, financial condition, or operating results for the entire fiscal
year. Our quarterly results of operations have varied in the past and are likely to do so again in
the future. As such, we believe that period-to-period comparisons of our results of operations
should not be relied upon as an indication of our future performance.
Impact of inflation and changing prices
Although we do not believe that inflation has had a material impact on 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 not increase with
these increased costs. In addition, inflation could materially increase the interest rates on our
debt.
Off-balance sheet arrangements
Our off-balance sheet arrangements consist of operating lease obligations and letters of credit. We
do not have any non-cancelable purchase commitments as of February 2, 2008. Our letters of credit
outstanding under our revolving credit facility were $0.3 million as of February 2, 2008.
Contractual obligations
We lease retail stores, warehouses, corporate offices and certain equipment under operating leases
with various expiration dates through fiscal 2019. Our store leases generally have initial lease
terms of 10 years and include renewal options under substantially the same terms and conditions as
the original leases. In addition to future minimum lease payments, most of our lease agreements
include escalating rent provisions which we recognize straight-line over the term of the lease,
including any lease renewal periods deemed to be probable. For certain locations, we receive cash
tenant allowances and we report these amounts as deferred rent, which is amortized on a
straight-line basis as a reduction of rent expense over the term of the lease, including any lease
renewal periods deemed to be probable. While a number of our store leases include contingent
rentals, contingent rent amounts are insignificant.
The following table summarizes our contractual arrangements and the timing and effect that such
commitments are expected to have on our liquidity and cash flows in future periods. The table below
excludes variable expenses related to contingent rent, common area maintenance, insurance and real
estate taxes. The table below includes obligations for executed agreements for which we do not yet
have the right to control the use of the property as of February 2, 2008:
| Less Than | 1 to 3 | 3 to 5 | After 5 | |||||||||||||||||
| (In thousands) | Total | 1 Year | Years | Years | Years | |||||||||||||||
Operating lease
obligations(1) |
$ | 589,991 | $ | 68,549 | $ | 145,522 | $ | 127,272 | $ | 248,648 | ||||||||||
Revolving credit facility(2) |
74,770 | — | — | 74,770 | — | |||||||||||||||
Total |
$ | 664,761 | $ | 68,549 | $ | 145,522 | $ | 202,042 | $ | 248,648 | ||||||||||
| (1) | Variable operating lease obligations related to common area maintenance, insurance and real estate taxes are not included in the table above. Total expense related to common area maintenance, insurance and real estate taxes for fiscal 2007 was $13.8 million. | |
| (2) | Interest payments on the variable rate revolving credit facility are not included in the table above. Outstanding borrowings bear interest at the prime rate or the Eurodollar rate plus 1.00% up to $100 million and 1.25% thereafter. The interest rate on the outstanding balances under the facility as of February 2, 2008 was 4.812%. |
Critical accounting policies and estimates
Management’s discussion and analysis of financial condition and results of operations is based upon
our consolidated financial statements, which have been prepared in accordance with U.S. generally
accepted accounting principals (GAAP). The preparation of these financial statements required the
use of estimates and judgments that affect the reported amounts of our assets, liabilities,
37
revenues and expenses. Management bases estimates on historical experience and other assumptions it
believes to be reasonable under the circumstances and evaluates these estimates on an on-going
basis. Actual results may differ from these estimates. A discussion of our more significant
estimates follows. Management has discussed the development, selection, and disclosure of these
estimates and assumptions 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 vendor allowances including co-op advertising, markdowns, and
volume discounts. We record valuation adjustments to our inventories if the cost of a specific
product on hand exceeds the amount we expect to realize from the ultimate sale or disposal of the
inventory. These estimates are based on management’s judgment regarding future demand, age of
inventory, and analysis of historical experience. If actual demand or market conditions are
different than those projected by management, future merchandise margin rates may be unfavorably or
favorably affected by adjustments to these estimates.
Inventories are adjusted for the results of periodic physical inventory counts at each of our
locations. We record a shrink reserve representing management’s estimate of inventory losses by
location that have occurred since the date of the last physical count. This estimate is based on
management’s analysis of historical results and operating trends.
Adjustments to earnings resulting from revisions to management’s estimates of the lower of cost or
market and shrink reserves have been insignificant during fiscal 2007, 2006 and 2005.
Self-insurance
We are self-insured for certain losses related to health, workers’ compensation, and general
liability insurance. We maintain stop loss coverage with third-party insurers to limit our
liability exposure. Current stop loss coverage is $150,000 for health claims, $100,000 for general
liability claims, and $250,000 for workers’ compensation claims. Management estimates undiscounted
loss reserves associated with these liabilities in part by considering historical claims
experience, industry factors, and other actuarial assumptions including information provided by
third parties. Self-insurance reserves for fiscal 2007, 2006, and 2005 were $2.4 million, $2.3
million and $2.1 million, respectively. Adjustments to earnings resulting from revisions to
management’s estimates of these reserves have been insignificant for fiscal 2007, 2006, and 2005.
Impairment of long-lived tangible assets
We review long-lived tangible assets whenever events or circumstances indicate these assets might
not be recoverable based on undiscounted future cash flows. Assets are reviewed at the lowest level
for which cash flows can be identified, which is the store level. Significant estimates are used in
determining future operating results of each store over its remaining lease term. If such assets
are considered to be impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the assets. We have not recorded an
impairment charge in any of the periods presented in the accompanying consolidated financial
statements.
Share-based compensation
Effective January 29, 2006, we adopted the fair value recognition and measurement provisions of
Statement of Financial Accounting Standards (SFAS) No. 123(R), Share-Based Payment. Pursuant to
SFAS No. 123(R), share-based compensation cost is measured at grant date, based on the fair value
of the award, and is recognized as expense over the requisite service period for awards expected to
vest. As a non-public entity that previously used the minimum value method for pro forma disclosure
purposes under SFAS No. 123, we were required to adopt the prospective method of accounting under
SFAS No. 123(R). Under this transitional method, we are required to record compensation expense in
the consolidated statements of income for all awards granted after the adoption date and to awards
modified, repurchased, or cancelled after the adoption date using the fair value provisions of SFAS
No. 123(R).
Prior to January 29, 2006, we accounted for share-based awards using the intrinsic value method of
accounting in accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock issued to Employees. Under the provisions of APB Opinion No. 25, no compensation expense was
recognized when stock options were granted with exercise prices equal to or greater than market
value at the grant date.
We estimate the grant date fair value of stock options using a Black-Scholes valuation model. The
expected volatility is based on volatilities of a peer group of publicly-traded companies. The risk
free interest rate is based on the U.S. Treasury yield curve in effect
38
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 be outstanding. We have elected to use the shortcut approach in accordance with
Staff Accounting Bulletin (SAB) No. 107, Share-Based Payment, to develop the expected life. We
recognize compensation cost related to the stock options on a straight-line method over the
requisite service period.
See Note 9 to our consolidated financial statements, “Share-based awards,” for disclosure related
to our stock compensation expense and related valuation model assumptions.
Recent accounting pronouncements
In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, Fair Value
Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in
accordance with U.S. GAAP and expands disclosures about fair value measurements. SFAS No. 157 is
effective for financial statements issued for fiscal years beginning after November 15, 2007 for
financial assets and liabilities and recurring non-financial assets and liabilities. The FASB has
provided a one year deferral for all non-financial and non-recurring assets and liabilities. We do
not expect the adoption of SFAS No. 157 to have a material effect on our consolidated financial
position or results of operations.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities. SFAS No. 159 permits all entities to choose to measure eligible items at
fair value on specified election dates. The associated unrealized gains and losses on the items for
which the fair value option has been elected shall be reported in earnings. SFAS No. 159 is
effective for financial statements issued for fiscal years beginning after November 15, 2007. We do
not expect the adoption of SFAS No. 159 to have a material effect on our consolidated financial
position or results of operations.
In December 2007, the Securities and Exchange Commission (SEC) issued SAB No. 110, Simplified
Method for Plain Vanilla Share Options. SAB No. 110 amends the views of the SEC staff regarding the
use of a “simplified” method, as discussed in SAB No. 107, in developing an estimate of expected
term of “plain vanilla” share options in accordance with SFAS No. 123(R). In particular, the staff
indicated in SAB No. 107 that it will accept a company’s election to use the “simplified” method
for share option grants prior to December 31, 2007. SAB No. 110 allows public companies which do
not have historically sufficient experience to provide a reasonable estimate to continue to use the
“simplified” method for estimating the expected term of “plain vanilla” share option grants after
December 31, 2007. We will continue to use the “simplified” method until we have enough historical
experience to provide a reasonable estimate of the expected term in accordance with SAB No. 110.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Market risk represents the risk of loss that may impact our financial position due to adverse
changes in financial market prices and rates. Our market risk exposure is primarily the result of
fluctuations in interest rates. We do not hold or issue financial instruments for trading purposes.
Interest rate sensitivity
We are exposed to interest rate risks primarily through borrowing under our credit facility.
Interest on our borrowings is based upon variable rates. We have an interest rate swap agreement in
place with a notional amount of $25.0 million which effectively converts variable rate debt to
fixed rate debt at an interest rate of 5.11%. The interest rate swap reflected in the consolidated
balance sheets as of February 2, 2008 and February 3, 2007 had a negative fair value of $1.2
million included in accrued liabilities and a positive fair value of $32,000 included in other
assets, respectively. The interest rate swap is designated as a cash flow hedge, the effective
portion of which is recorded as an unrecognized gain (loss) in other comprehensive income (loss) in
stockholders’ equity. Our weighted average debt for fiscal 2007 was $56.9 million, adjusted for the
$25.0 million hedged amount. A hypothetical 1% increase or decrease in interest rates would have
resulted in a $0.6 million change to our interest expense for fiscal 2007.
Item 8. Financial Statements and Supplementary Data
See the index included under Item 15, “Exhibits and Financial Statement Schedules”.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
39
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures over Financial Reporting
We have established disclosure controls and procedures to ensure 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 2, 2008, our Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are effective to ensure that the
information required to be disclosed by us in our reports that we file or submit under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission’s rules and forms.
Changes in Internal Control over Financial Reporting
There were no changes to our internal controls over financial reporting during the three months
ended February 2, 2008 that have materially affected, or are reasonably likely to materially
affect, our internal controls over financial reporting.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting for the Company. Internal control over financial reporting is a process
designed by, or under the supervision of the principal executive officer and principal financial
officer and effected by the board of directors, management and other personnel, to provide
reasonable assurance regarding the reliability of our financial reporting and the preparation of
financial statements for external purposes in accordance with accounting principles generally
accepted in the United States of America.
Under the supervision and with the participation of our Chief Executive Officer and our Chief
Financial Officer, management evaluated the effectiveness of our internal control over financial
reporting as of February 2, 2008, based on the criteria established in “Internal Control —
Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Based on this evaluation, management concluded that our internal controls over
financial reporting were effective as of February 2, 2008.
This Form 10-K does not include an attestation report of the Company’s registered public accounting
firm regarding internal control over financial reporting. The Company’s internal controls over
financial reporting were not subject to attestation by the Company’s registered public accounting
firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company
to provide only management’s report in this annual report.
Item 9B. Other Information
None.
40
Part III
Item 10. Directors, Executive Officers and Corporate Governance
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 2, 2008 pursuant to
Regulation 14A under the Exchange Act in connection with our 2007 annual meeting of stockholders.
Item 11. Executive Compensation
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 2, 2008 pursuant to
Regulation 14A under the Exchange Act in connection with our 2007 annual meeting of stockholders.
Item 12. Security Ownership and Certain Beneficial Owners and Management and Related Stockholder
Matters
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 2, 2008 pursuant to
Regulation 14A under the Exchange Act in connection with our 2007 annual meeting of stockholders.
Item 13. Certain Relationships and Related Transactions, and Director Independence
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 2, 2008 pursuant to
Regulation 14A under the Exchange Act in connection with our 2007 annual meeting of stockholders.
Item 14. Principal 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 2, 2008 pursuant to
Regulation 14A under the Exchange Act in connection with our 2007 annual meeting of stockholders.
41
Part IV
Item 15. Exhibits and Financial Statement Schedules
(a) The following documents are filed as a part of this Form 10-K:
| 43 | ||||
| 44 | ||||
| 46 | ||||
| 47 | ||||
| 49 | ||||
| 52 | ||||
| 64 |
The schedules required by Form 10-K have been omitted because they were inapplicable, included in
the notes to the consolidated financial statements, or otherwise not required under the
instructions contained in Regulation S-X.
42
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Ulta Salon, Cosmetics & Fragrance, Inc.
Ulta Salon, Cosmetics & Fragrance, Inc.
We have audited the accompanying consolidated balance sheets of Ulta Salon, Cosmetics & Fragrance,
Inc. (the Company) as of February 2, 2008 and February 3, 2007, and the related consolidated
statements of income, cash flows, and stockholders’ equity for each of the three years in the
period ended February 2, 2008. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. We
were not engaged to perform an audit of the Company’s internal control over financial reporting.
Our audits included consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Ulta Salon, Cosmetics & Fragrance, Inc. at
February 2, 2008 and February 3, 2007, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended February 2, 2008, in conformity with U.S.
generally accepted accounting principles.
As discussed in Note 2 to the financial statements, effective January 29, 2006, the Company changed
its method of accounting for share-based compensation upon the adoption of Statement of Financial
Accounting Standards No. 123(R), Share-Based Payment.
/s/ Ernst & Young LLP
Chicago, Illinois
April 11, 2008
Chicago, Illinois
April 11, 2008
43
Ulta Salon, Cosmetics & Fragrance, Inc.
Consolidated Balance Sheets
Consolidated Balance Sheets
| February 2, | February 3, | |||||||
| (In thousands) | 2008 | 2007 | ||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 3,789 | $ | 3,645 | ||||
Receivables, net |
20,643 | 18,476 | ||||||
Merchandise inventories, net |
176,109 | 129,237 | ||||||
Prepaid expenses and other current assets |
19,184 | 15,276 | ||||||
Deferred income taxes |
9,219 | 5,412 | ||||||
Total current assets |
228,944 | 172,046 | ||||||
Property and equipment, net |
236,389 | 162,080 | ||||||
Deferred income taxes |
4,080 | 4,125 | ||||||
Other assets |
— | 346 | ||||||
Total assets |
$ | 469,413 | $ | 338,597 | ||||
Liabilities and stockholders’ equity |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 52,122 | $ | 43,071 | ||||
Accrued liabilities |
54,719 | 38,604 | ||||||
Accrued income taxes |
5,064 | 2,266 | ||||||
Total current liabilities |
111,905 | 83,941 | ||||||
Notes payable |
74,770 | 50,737 | ||||||
Deferred rent |
71,235 | 50,367 | ||||||
Total liabilities |
257,910 | 185,045 | ||||||
Commitments and contingencies |
||||||||
Series III redeemable preferred stock |
— | 4,792 | ||||||
See accompanying notes to consolidated financial statements.
44
Ulta Salon, Cosmetics & Fragrance, Inc.
Consolidated Balance Sheets (continued)
Consolidated Balance Sheets (continued)
| February 2, | February 3, | |||||||
| (In thousands, except per share data) | 2008 | 2007 | ||||||
Stockholders’ equity: |
||||||||
Preferred stock |
$ | — | $ | 223,059 | ||||
Treasury stock-preferred, at cost |
— | (12 | ) | |||||
Common stock, $.01 par value, 400,000 shares
authorized; 57,411 and 7,409 shares issued;
56,906 and 7,167 shares outstanding; at
February 2, 2008, and February 3, 2007,
respectively |
574 | 117 | ||||||
Treasury stock-common, at cost |
(4,179 | ) | (2,217 | ) | ||||
Additional paid-in capital |
284,951 | 15,501 | ||||||
Related party notes receivable |
— | (4,467 | ) | |||||
Accumulated deficit |
(69,124 | ) | (83,240 | ) | ||||
Accumulated other comprehensive income (loss) |
(719 | ) | 19 | |||||
Total stockholders’ equity |
211,503 | 148,760 | ||||||
Total liabilities and stockholders’ equity |
$ | 469,413 | $ | 338,597 | ||||
See accompanying notes to consolidated financial statements.
45
Ulta Salon, Cosmetics & Fragrance, Inc.
Consolidated Statements of Income
Consolidated Statements of Income
| Fiscal year ended | ||||||||||||
| February 2, | February 3, | January 28, | ||||||||||
| (In thousands, except per share data) | 2008 | 2007 | 2006 | |||||||||
Net sales |
$ | 912,141 | $ | 755,113 | $ | 579,075 | ||||||
Cost of sales |
628,495 | 519,929 | 404,794 | |||||||||
Gross profit |
283,646 | 235,184 | 174,281 | |||||||||
Selling, general and administrative
expenses |
225,167 | 188,000 | 140,145 | |||||||||
Pre-opening expenses |
11,758 | 7,096 | 4,712 | |||||||||
Operating income |
46,721 | 40,088 | 29,424 | |||||||||
Interest expense |
4,542 | 3,314 | 2,951 | |||||||||
Income before income taxes |
42,179 | 36,774 | 26,473 | |||||||||
Income tax expense |
16,844 | 14,231 | 10,504 | |||||||||
Net income |
$ | 25,335 | $ | 22,543 | $ | 15,969 | ||||||
Less preferred stock dividends |
11,219 | 14,584 | 12,922 | |||||||||
Net income available to common
stockholders |
$ | 14,116 | $ | 7,959 | $ | 3,047 | ||||||
Net income per common share: |
||||||||||||
Basic |
$ | 0.69 | $ | 1.38 | $ | 0.74 | ||||||
Diluted |
$ | 0.48 | $ | 0.45 | $ | 0.33 | ||||||
Weighted average common shares
outstanding: |
||||||||||||
Basic |
20,383 | 5,771 | 4,094 | |||||||||
Diluted |
53,293 | 49,921 | 48,196 | |||||||||
See accompanying notes to consolidated financial statements.
46
Ulta Salon, Cosmetics & Fragrance, Inc.
Consolidated Statements of Cash Flows
Consolidated Statements of Cash Flows
| Fiscal year ended | ||||||||||||
| February 2, | February 3, | January 28, | ||||||||||
| (In thousands) | 2008 | 2007 | 2006 | |||||||||
Operating activities |
||||||||||||
Net income |
$ | 25,335 | $ | 22,543 | $ | 15,969 | ||||||
Adjustments to reconcile net income to net cash
provided by operating activities: |
||||||||||||
Depreciation and amortization |
39,503 | 29,736 | 22,285 | |||||||||
Deferred income taxes |
(3,284 | ) | (3,080 | ) | (3,037 | ) | ||||||
Non-cash stock compensation charges |
2,283 | 983 | 468 | |||||||||
Excess tax benefits from stock-based compensation |
(1,575 | ) | (5,360 | ) | (213 | ) | ||||||
Loss on disposal of property and equipment |
195 | 3,518 | 1,230 | |||||||||
Change in operating assets and liabilities: |
||||||||||||
Receivables |
(2,167 | ) | (2,719 | ) | (830 | ) | ||||||
Merchandise inventories |
(46,872 | ) | (19,863 | ) | (5,134 | ) | ||||||
Prepaid expenses and other assets |
(3,594 | ) | (449 | ) | (2,542 | ) | ||||||
Accounts payable |
9,051 | 8,636 | (5,505 | ) | ||||||||
Accrued liabilities |
7,163 | 11,767 | 7,753 | |||||||||
Deferred rent |
20,868 | 9,918 | 7,157 | |||||||||
Net cash provided by operating activities |
46,906 | 55,630 | 37,601 | |||||||||
Investing activities |
||||||||||||
Purchases of property and equipment, net |
(101,866 | ) | (62,331 | ) | (41,607 | ) | ||||||
Receipt of related party notes receivable |
4,467 | — | — | |||||||||
Issuance of related party notes receivable |
— | (2,414 | ) | — | ||||||||
Net cash used in investing activities |
(97,399 | ) | (64,745 | ) | (41,607 | ) | ||||||
Financing activities |
||||||||||||
Proceeds on long-term borrowings |
1,094,590 | 851,468 | 644,817 | |||||||||
Payments on long-term borrowings |
(1,070,557 | ) | (846,112 | ) | (641,652 | ) | ||||||
Proceeds from issuance of common stock in initial
public offering, net of issuance costs |
123,608 | — | — | |||||||||
Payment of accumulated dividends in arrears |
(93,012 | ) | — | — | ||||||||
Redemption of Series III preferred stock |
(4,792 | ) | — | — | ||||||||
Purchase of treasury stock |
(1,950 | ) | (2,217 | ) | — | |||||||
Excess tax benefits from stock-based compensation |
1,575 | 5,360 | 213 | |||||||||
Proceeds from issuance of common stock under
stock plans |
1,175 | 1,422 | 615 | |||||||||
Principal payments under capital lease obligations |
— | — | (167 | ) | ||||||||
Proceeds from issuance of preferred stock |
— | — | 15 | |||||||||
Net cash provided by financing activities |
50,637 | 9,921 | 3,841 | |||||||||
Net increase (decrease) in cash and cash equivalents |
144 | 806 | (165 | ) | ||||||||
Cash and cash equivalents at beginning of year |
3,645 | 2,839 | 3,004 | |||||||||
Cash and cash equivalents at end of year |
$ | 3,789 | $ | 3,645 | $ | 2,839 | ||||||
See accompanying notes to consolidated financial statements.
47
Ulta Salon, Cosmetics & Fragrance, Inc.
Consolidated Statements of Cash Flows (continued)
Consolidated Statements of Cash Flows (continued)
| Fiscal year ended | ||||||||||||
| February 2, | February 3, | January 28, | ||||||||||
| (In thousands) | 2008 | 2007 | 2006 | |||||||||
Supplemental cash flow information |
||||||||||||
Cash paid for interest |
$ | 5,429 | $ | 3,798 | $ | 3,218 | ||||||
Cash paid for income taxes |
$ | 16,146 | $ | 17,193 | $ | 9,766 | ||||||
Noncash investing and financing activities: |
||||||||||||
Purchases of property and equipment included in
accrued liabilities |
$ | 12,141 | $ | 4,010 | $ | — | ||||||
Unrealized loss (gain) on interest rate swap hedge,
net of tax |
$ | 738 | $ | (68 | ) | $ | (427 | ) | ||||
Issuance of related party notes receivable for
exercise
of stock options |
$ | — | $ | (1,680 | ) | $ | — | |||||
See accompanying notes to consolidated financial statements.
48
Ulta Salon, Cosmetics & Fragrance, Inc.
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Stockholders’ Equity
| Series I | Series II | Series IV | Series V | Series V-I | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Convertible, Voting, | Convertible, Voting, | Convertible, Voting, | Convertible, Voting, | Convertible, Voting, | Total | Treasury - | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Preferred Stock | Preferred Stock | Preferred Stock | Preferred Stock | Preferred Stock | Preferred Stock | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Par Value | $.01 | $.01 | $.01 | $.01 | $.01 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Authorized Shares | 17,208 | 7,634 | 19,184 | 22,500 | 4,600 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Issued | Issued | Issued | Issued | Issued | Issued | Treasury | ||||||||||||||||||||||||||||||||||||||||||||||||||
| (In thousands, except per share data) | Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||
Balance — January 29, 2005 |
16,769 | $ | 35,237 | 7,634 | $ | 74,455 | 19,184 | $ | 38,238 | 21,448 | $ | 45,703 | 920 | $ | 1,905 | 65,955 | $ | 195,538 | (38 | ) | $ | (12 | ) | |||||||||||||||||||||||||||||||||
Issuance of stock |
146 | 15 | — | — | — | — | — | — | — | — | 146 | 15 | — | — | ||||||||||||||||||||||||||||||||||||||||||
Accretion of preferred dividends |
— | 3,788 | — | — | — | 4,058 | — | 4,873 | — | 203 | — | 12,922 | — | — | ||||||||||||||||||||||||||||||||||||||||||
Balance — January 28, 2006 |
16,915 | 39,040 | 7,634 | 74,455 | 19,184 | 42,296 | 21,448 | 50,576 | 920 | 2,108 | 66,101 | 208,475 | (38 | ) | (12 | ) | ||||||||||||||||||||||||||||||||||||||||
Accretion of preferred dividends |
— | 4,277 | — | — | — | 4,575 | — | 5,503 | — | 229 | — | 14,584 | — | — | ||||||||||||||||||||||||||||||||||||||||||
Balance — February 3, 2007 |
16,915 | 43,317 | 7,634 | 74,455 | 19,184 | 46,871 | 21,448 | 56,079 | 920 | 2,337 | 66,101 | 223,059 | (38 | ) | (12 | ) | ||||||||||||||||||||||||||||||||||||||||
Purchase of treasury stock |
— | — | — | — | — | — | — | — | — | — | — | — | (360 | ) | (1,803 | ) | ||||||||||||||||||||||||||||||||||||||||
Accretion of preferred dividends |
— | 3,107 | — | — | — | 3,590 | — | 4,341 | — | 181 | — | 11,219 | — | — | ||||||||||||||||||||||||||||||||||||||||||
Payment of accumulated preferred dividends
in arrears |
— | (30,845 | ) | — | — | — | (31,311 | ) | — | (29,663 | ) | — | (1,193 | ) | — | (93,012 | ) | — | — | |||||||||||||||||||||||||||||||||||||
Conversion of preferred stock to common stock
in conjunction with initial public offering |
(16,915 | ) | (15,579 | ) | (7,634 | ) | (74,455 | ) | (19,184 | ) | (19,150 | ) | (21,448 | ) | (30,757 | ) | (920 | ) | (1,325 | ) | (66,101 | ) | (141,266 | ) | 398 | 1,815 | ||||||||||||||||||||||||||||||
Balance — February 2, 2008 |
— | $ | — | — | $ | — | — | $ | — | — | $ | — | — | $ | — | — | $ | — | — | $ | — | |||||||||||||||||||||||||||||||||||
See accompanying notes to consolidated financial statements.
49
Ulta Salon, Cosmetics & Fragrance, Inc.
Consolidated Statements of Stockholders’ Equity (continued)
Consolidated Statements of Stockholders’ Equity (continued)
| Treasury - | ||||||||||||||||||||||||||||||||||||||||
| Common Stock | Common Stock | |||||||||||||||||||||||||||||||||||||||
| Par Value | $.01 | Related | Accumulated | |||||||||||||||||||||||||||||||||||||
| Authorized Shares | 400,000 | Additional | Deferred | Party | Other | Total | ||||||||||||||||||||||||||||||||||
| Issued | Treasury | Paid-In | Stock-based | Notes | Accumulated | Comprehensive | Stockholders’ | |||||||||||||||||||||||||||||||||
| (In thousands, except per share data) | Shares | Amount | Shares | Amount | Capital | Compensation | Receivable | Deficit | Income (Loss) | Equity | ||||||||||||||||||||||||||||||
Balance — January 29, 2005 |
3,927 | $ | 101 | (1 | ) | $ | — | $ | 5,506 | $ | (730 | ) | $ | (373 | ) | $ | (94,246 | ) | $ | (476 | ) | $ | 105,308 | |||||||||||||||||
Issuance of stock |
586 | (30 | ) | — | — | 645 | — | — | — | — | 630 | |||||||||||||||||||||||||||||
Accretion of preferred dividends |
— | — | — | — | — | — | — | (12,922 | ) | — | — | |||||||||||||||||||||||||||||
Unrealized gain on interest rate swap
hedge, net of $279 income tax |
— | — | — | — | — | — | — | — | 427 | 427 | ||||||||||||||||||||||||||||||
Net income for the fiscal year ended
January 28, 2006 |
— | — | — | — | — | — | — | 15,969 | — | 15,969 | ||||||||||||||||||||||||||||||
Comprehensive income |
— | — | — | — | — | — | — | — | 16,396 | |||||||||||||||||||||||||||||||
Excess tax benefits from stock-based
compensation |
— | — | — | — | 213 | — | — | — | 213 | |||||||||||||||||||||||||||||||
Stock compensation charge |
— | — | — | — | 169 | — | — | — | 169 | |||||||||||||||||||||||||||||||
Amortization of deferred stock-based
compensation |
— | — | — | — | — | 299 | — | — | 299 | |||||||||||||||||||||||||||||||
Balance — January 28, 2006 |
4,513 | 71 | (1 | ) | — | 6,533 | (431 | ) | (373 | ) | (91,199 | ) | (49 | ) | 123,015 | |||||||||||||||||||||||||
Issuance of stock |
2,896 | 46 | — | — | 3,056 | — | — | — | — | 3,102 | ||||||||||||||||||||||||||||||
Purchase of treasury stock |
— | — | (241 | ) | (2,217 | ) | — | — | — | — | — | (2,217 | ) | |||||||||||||||||||||||||||
Accretion of preferred dividends |
— | — | — | — | — | — | — | (14,584 | ) | — | — | |||||||||||||||||||||||||||||
Issuance of related party notes receivable |
— | — | — | — | — | — | (4,094 | ) | — | — | (4,094 | ) | ||||||||||||||||||||||||||||
Unrealized gain on interest rate swap
hedge, net of $44 income tax |
— | — | — | — | — | — | — | — | 68 | 68 | ||||||||||||||||||||||||||||||
Net income for the fiscal year ended
February 3, 2007 |
— | — | — | — | — | — | — | 22,543 | — | 22,543 | ||||||||||||||||||||||||||||||
Comprehensive income |
— | — | — | — | — | — | — | — | — | 22,611 | ||||||||||||||||||||||||||||||
Excess tax benefits from stock-based
compensation |
— | — | — | — | 5,360 | — | — | — | — | 5,360 | ||||||||||||||||||||||||||||||
Reclassification of deferred compensation on
SFAS 123(R) adoption |
— | — | — | — | (431 | ) | 431 | — | — | — | — | |||||||||||||||||||||||||||||
Stock compensation charge |
— | — | — | — | 690 | — | — | — | — | 690 | ||||||||||||||||||||||||||||||
Amortization of deferred stock-based
compensation |
— | — | — | — | 293 | — | — | — | — | 293 | ||||||||||||||||||||||||||||||
Balance — February 3, 2007 |
7,409 | $ | 117 | (242 | ) | $ | (2,217 | ) | $ | 15,501 | $ | — | $ | (4,467 | ) | $ | (83,240 | ) | $ | 19 | $ | 148,760 | ||||||||||||||||||
See accompanying notes to consolidated financial statements.
50
Ulta Salon, Cosmetics & Fragrance, Inc.
Consolidated Statements of Stockholders’ Equity (continued)
Consolidated Statements of Stockholders’ Equity (continued)
| Treasury - | ||||||||||||||||||||||||||||||||||||||||
| Common Stock | Common Stock | |||||||||||||||||||||||||||||||||||||||
| Par Value | $.01 | Related | Accumulated | |||||||||||||||||||||||||||||||||||||
| Authorized Shares | 400,000 | Additional | Deferred | Party | Other | Total | ||||||||||||||||||||||||||||||||||
| Issued | Treasury | Paid-In | Stock-based | Notes | Accumulated | Comprehensive | Stockholders’ | |||||||||||||||||||||||||||||||||
| (In thousands, except per share data) | Shares | Amount | Shares | Amount | Capital | Compensation | Receivable | Deficit | Income (Loss) | Equity | ||||||||||||||||||||||||||||||
Balance — February 3, 2007 |
7,409 | $ | 117 | (242 | ) | $ | (2,217 | ) | $ | 15,501 | $ | — | $ | (4,467 | ) | $ | (83,240 | ) | $ | 19 | $ | 148,760 | ||||||||||||||||||
Common stock options exercised |
559 | 5 | — | — | 1,170 | — | — | — | — | 1,175 | ||||||||||||||||||||||||||||||
Purchase of treasury stock |
— | — | (11 | ) | (147 | ) | — | — | — | — | — | (1,950 | ) | |||||||||||||||||||||||||||
Accretion of preferred dividends |
— | — | — | — | — | — | — | (11,219 | ) | — | — | |||||||||||||||||||||||||||||
Receipt of related party notes receivable |
— | — | — | — | — | — | 4,467 | — | — | 4,467 | ||||||||||||||||||||||||||||||
Unrealized loss on interest rate swap
hedge, net of $478 income tax |
— | — | — | — | — | — | — | — | (738 | ) | (738 | ) | ||||||||||||||||||||||||||||
Net income for the fiscal year ended
February 2, 2008 |
— | — | — | — | — | — | — | 25,335 | — | 25,335 | ||||||||||||||||||||||||||||||
Comprehensive income |
— | — | — | — | — | — | — | — | — | 24,597 | ||||||||||||||||||||||||||||||
Excess tax benefits from stock-based
compensation |
— | — | — | — | 1,575 | — | — | — | — | 1,575 | ||||||||||||||||||||||||||||||
Stock compensation charge |
— | — | — | — | 2,152 | — | — | — | — | 2,152 | ||||||||||||||||||||||||||||||
Amortization of deferred stock-based
compensation |
— | — | — | — | 131 | — | — | — | — | 131 | ||||||||||||||||||||||||||||||
Restate par value of common stock |
— | (43 | ) | — | — | 43 | — | — | — | — | — | |||||||||||||||||||||||||||||
Issuance of common stock in initial public
offering,
net of issuance costs |
7,667 | 77 | — | — | 123,531 | — | — | — | — | 123,608 | ||||||||||||||||||||||||||||||
Payment of accumulated preferred dividends
in arrears |
— | — | — | — | — | — | — | — | — | (93,012 | ) | |||||||||||||||||||||||||||||
Conversion of preferred stock to common stock
in conjunction with initial public offering |
41,776 | 418 | (252 | ) | (1,815 | ) | 140,848 | — | — | — | — | — | ||||||||||||||||||||||||||||
Balance — February 2, 2008 |
57,411 | $ | 574 | (505 | ) | $ | (4,179 | ) | $ | 284,951 | $ | — | $ | — | $ | (69,124 | ) | $ | (719 | ) | $ | 211,503 | ||||||||||||||||||
See accompanying notes to consolidated financial statements.
51
Ulta Salon, Cosmetics & Fragrance, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
Notes to Consolidated Financial Statements
(In thousands, except per share data)
1. Business and basis of presentation
The accompanying consolidated financial statements of Ulta Salon, Cosmetics & Fragrance, Inc. (the
Company) include Ulta Salon, Cosmetics & Fragrance, Inc. and its wholly owned subsidiary, Ulta
Internet Holdings, Inc. (Internet). All intercompany balances and transactions have been
eliminated. The operations of Internet were merged into the Company during 2006, resulting in its
dissolution as a separate legal entity on November 30, 2006.
The Company was incorporated in the state of Delaware on January 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 February 2, 2008, the Company
operated 249 stores in 31 states.
All amounts are stated in thousands, with the exception of per share amounts and number of stores.
Reverse stock split
On September 17, 2007, the Company’s board of directors approved a resolution to effect a reverse
stock split of the Company’s common stock pursuant to which each share of common stock was to be
converted into 0.632 of one share of common stock. The reverse stock split became effective on
October 22, 2007. Any fractional shares resulting from the reverse stock split were rounded to the
nearest whole share. Common share and per share amounts for all periods presented and the
conversion ratio of preferred to common shares have been adjusted for the 0.632 for 1 reverse stock
split.
Initial public offering
On October 30, 2007, the Company completed an initial public offering in which the Company sold
7,667 shares of common stock resulting in net proceeds of $123,608 after deducting underwriting
discounts and commissions and offering expenses. Selling stockholders sold approximately 2,154
additional shares of common stock. The Company did not receive any proceeds from the sale of shares
by the selling stockholders. The Company used the net proceeds from the offering to pay $93,012 of
accumulated dividends in arrears on the Company’s preferred stock, which satisfied all amounts due
with respect to accumulated dividends, $4,792 to redeem the Company’s Series III preferred stock,
and $25,804 to reduce the Company’s borrowings under its third amended and restated loan and
security agreement and for general corporate purposes. Also in connection with the offering, the
Company converted preferred shares into 41,524 common shares and restated the par value of its
common stock to $0.01 per share.
2. Summary of significant accounting policies
Fiscal year
The Company’s fiscal year is the 52 or 53 weeks ending on the Saturday closest to January 31. The
Company’s fiscal years ended February 2, 2008 (fiscal 2007), February 3, 2007 (fiscal 2006) and
January 28, 2006 (fiscal 2005) were 52, 53 and 52 week years, respectively.
Reclassifications
Certain reclassifications have been made to the fiscal 2006 financial statements to conform to the
fiscal 2007 presentation.
Use of estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting
principles (GAAP) requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the accounting period. Actual results could differ from those
estimates.
Cash and cash equivalents
Cash and cash equivalents include cash on hand and highly liquid investments with maturities of
three months or less from the date of purchase.
52
Receivables
Receivables consist principally of amounts receivable from vendors related to allowances earned but
not yet received. These receivables are computed based on provisions of the vendor agreements in
place and the Company’s completed performance. The Company’s vendors are primarily U.S.-based
producers of consumer products. The Company does not require collateral on its receivables and does
not accrue interest. Credit risk with respect to receivables is limited due to the diversity of
vendors comprising the Company’s vendor base. The Company performs ongoing credit evaluations of
its vendors and evaluates the collectibility of its receivables based on the length of time the
receivable is past due and historical experience. The allowance for receivables totaled $309 and
$422 as of February 2, 2008 and February 3, 2007, respectively.
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
estimated fair value of the Company’s variable rate debt approximates its carrying value since the
rate of interest on the variable rate debt is revised frequently based upon the current prime rate
or the Eurodollar rate.
Derivative financial instruments
The Company’s derivative financial instruments are designated and qualify as cash flow hedges.
Accordingly, the effective portion of the gain or loss on the derivative instrument is reported as
a component of accumulated other comprehensive income (loss) and reclassified into interest expense
in the same period or periods during which the hedged transaction affects earnings. The remaining
gain or loss, the ineffective portion, on the derivative instrument, if other than inconsequential,
is recognized in interest expense during the period of change. Derivatives are recorded in the
consolidated balance sheets at fair value.
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 |
3 to 10 years | |||
Leasehold improvements |
10 years | |||
Electronic equipment and software |
3 to 5 years |
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 capitalizes interest related to construction projects and depreciates that amount over
the lives of the related assets.
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
The Company maintains several customer loyalty programs. The Company’s national program provides
reward point certificates for free beauty products. Customers earn purchased-based reward points
and redeem the related reward certificate during specific promotional periods during the year. The
Company is also piloting a loyalty program in several markets in which customers earn
purchased-based points on an annual basis which can be redeemed at any time. The Company accrues
the 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 2,
2008 and February 3, 2007 was $3,293 and $2,808, respectively. The cost of these programs, which
was $8,167, $6,660 and $4,369 in fiscal 2007, 2006 and 2005, respectively, is included in cost of
sales in the consolidated statements of income.
53
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.
As part of many lease agreements, the Company receives construction allowances from landlords for
tenant improvements. These leasehold improvements made by the Company are capitalized and amortized
over the shorter of their estimated useful lives or the lease term. The construction allowances are
recorded as deferred rent and amortized on a straight-line basis over the lease term as a reduction
of rent expense.
Revenue recognition
Net sales include merchandise sales and salon service revenue. Revenue 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 and other incentives are
recorded as a reduction of net sales. State sales taxes are presented on a net basis as the Company
considers itself a pass-through conduit for collecting and remitting state sales tax.
Vendor allowances
The Company receives allowances from vendors in the normal course of business including advertising
and markdown allowances, purchase volume discounts and rebates, and reimbursement for defective
merchandise, and certain selling and display expenses.
Substantially all vendor allowances are recorded as a reduction of the vendor’s product cost and
are recognized in cost of sales as the product is sold.
Advertising
Advertising expense consists principally of paper, print, and distribution costs related to the
Company’s advertising circulars. The Company expenses the production and distribution costs related
to its advertising circulars in the period the related promotional event occurs. As of February 2,
2008 and February 3, 2007, all advertising costs had been expensed. Total advertising costs,
exclusive of incentives from vendors and start-up advertising expense, amounted to $56,107, $43,383
and $34,829 for fiscal 2007, 2006 and 2005, respectively.
Pre-opening expenses
Non-capital expenditures incurred prior to the grand opening of a new store are charged against
earnings as incurred.
Cost of sales
Cost of sales includes the cost of merchandise sold including all vendor allowances, which are
treated as a reduction of merchandise costs; warehousing and distribution costs including labor and
related benefits, freight, rent, depreciation and amortization, real estate taxes, utilities, and
insurance; store occupancy costs including rent, depreciation and amortization, real estate taxes,
utilities, repairs and maintenance, insurance, licenses, and cleaning expenses; salon payroll and
benefits; and shrink and inventory valuation reserves.
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 Sarbanes-Oxley compliance expenses; stock-based
compensation expense; depreciation and amortization for all assets except those related to our
retail and warehouse operations which is 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 used for
income tax purposes and the amounts reported were derived using the enacted tax rates in effect for
the year the differences are expected to reverse.
54
Share-based compensation
Effective January 29, 2006, the Company adopted the fair value recognition and measurement
provisions of Statement of Financial Accounting Standards (SFAS) No. 123(R), Share-Based Payment.
Pursuant to SFAS No. 123(R), share-based compensation cost is measured at grant date, based on the
fair value of the award, and is recognized as expense over the requisite service period for awards
expected to vest. As a non-public entity that previously used the minimum value method for pro
forma disclosure purposes under SFAS No. 123, the Company was required to adopt the prospective
method of accounting under SFAS No. 123(R). Under this transitional method, the Company is required
to record compensation expense in the consolidated statements of income for all awards granted
after the adoption date and to awards modified, repurchased or cancelled after the adoption date
using the fair value provisions of SFAS No. 123(R).
Prior to January 29, 2006, the Company accounted for share-based awards using the intrinsic value
method of accounting in accordance with Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock issued to Employees. Under the provisions of APB No. 25, no compensation
expense was recognized when stock options were granted with exercise prices equal to or greater
than market value at the grant date. Prior period pro forma net income and earnings per share
amounts are not presented in accordance with the provisions of SFAS No. 123(R).
The Company recorded stock compensation expense of $2,283, $3,472 and $468 for fiscal 2007, 2006
and 2005, respectively (see Note 9, “Share-based awards”).
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’s
liability exposure. Liabilities associated with these losses are estimated in part by considering
historical claims experience, industry factors, severity factors, and actuarial assumptions. Should
a different amount of liabilities develop compared to what was estimated, reserves may need to be
adjusted accordingly in future periods.
Net income per common share
Basic net income per common share is computed by dividing income available to common stockholders
by the weighted-average number of shares of common stock outstanding during the period. Diluted net
income per share includes dilutive common stock equivalents, using the treasury stock method, and
assumes that the convertible preferred shares outstanding were converted, with related preferred
stock dividend requirements and outstanding common shares adjusted accordingly, except when the
effect would be anti-dilutive.
Comprehensive income
Comprehensive income is comprised of net income and gains and losses from derivative instruments
designated as cash flow hedges, net of income tax. Total comprehensive income is as follows:
| Fiscal | Fiscal | Fiscal | ||||||||||
| 2007 | 2006 | 2005 | ||||||||||
Net income |
$ | 25,335 | $ | 22,543 | $ | 15,969 | ||||||
Unrealized (loss) gain on interest
rate swap hedge, net of income tax |
(738 | ) | 68 | 427 | ||||||||
Comprehensive income |
$ | 24,597 | $ | 22,611 | $ | 16,396 | ||||||
Recent accounting pronouncements
In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, Fair Value
Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in
accordance with U.S. GAAP and expands disclosures about fair value measurements. SFAS No. 157 is
effective for financial statements issued for fiscal years beginning after November 15, 2007 for
financial assets and liabilities and recurring non-financial assets and liabilities. The FASB has
provided a one year deferral for all non-financial and non-recurring assets and liabilities. The
Company does not expect the adoption of SFAS No. 157 to have a material effect on its consolidated
financial position or results of operations.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities. SFAS No. 159 permits all entities to choose to measure eligible items at
fair value on specified election dates. The associated unrealized gains and losses on the items for
which the fair value option has been elected shall be reported in earnings. SFAS No. 159 is
effective for financial statements issued for fiscal years beginning after November 15, 2007. The
Company does not expect the adoption of SFAS No. 159 to have a material effect on its consolidated
financial position or results of operations.
55
In December 2007, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin
(SAB) No. 110, Simplified Method for Plain Vanilla Share Options. SAB No. 110 amends the views of
the SEC staff regarding the use of a “simplified” method, as discussed in SAB No. 107, Share-Based
Payment, in developing an estimate of expected term of “plain vanilla” share options in accordance
with SFAS No. 123(R). In particular, the staff indicated in SAB No. 107 that it will accept a
company’s election to use the “simplified” method for share option grants prior to December 31,
2007. SAB No. 110 allows public companies which do not have historically sufficient experience to
provide a reasonable estimate to continue to use the “simplified” method for estimating the
expected term of “plain vanilla” share option grants after December 31, 2007. The Company will
continue to use the “simplified” method until it has enough historical experience to provide a
reasonable estimate of the expected term in accordance with SAB No. 110.
3. Property and equipment
Property and equipment consist of the following:
| February 2, | February 3, | |||||||
| 2008 | 2007 | |||||||
Equipment and fixtures |
$ | 136,039 | $ | 107,033 | ||||
Leasehold improvements |
149,022 | 119,750 | ||||||
Electronic equipment and software |
61,761 | 45,701 | ||||||
Construction-in-progress |
30,316 | 7,006 | ||||||
| 377,138 | 279,490 | |||||||
Less accumulated depreciation and amortization |
(140,749 | ) | (117,410 | ) | ||||
Property and equipment, net |
$ | 236,389 | $ | 162,080 | ||||
For the fiscal years 2007, 2006 and 2005, the Company capitalized interest of $771, $399 and $280,
respectively.
4. Commitments and contingencies
Leases — The Company leases retail stores, distribution and office facilities, and certain
equipment. Original non-cancelable lease terms range from 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 2007, 2006 and 2005. Total rent expense under operating leases was $51,977, $41,135 and
$34,564 for fiscal 2007, 2006 and 2005, respectively.
Future minimum lease payments under operating leases as of February 2, 2008, are as follows:
| Operating | ||||
| Fiscal year | Leases | |||
2008 |
$ | 68,549 | ||
2009 |
74,652 | |||
2010 |
70,870 | |||
2011 |
65,747 | |||
2012 |
61,525 | |||
2013 and thereafter |
248,648 | |||
Total minimum lease payments |
$ | 589,991 | ||
Included in the operating lease schedule above is $145,143 and $21,681 of minimum lease payments
for stores that will open in fiscal 2008 and 2009, 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 Court for the Northern District of Illinois. Each suit
alleges that the prospectus and registration statement filed pursuant to the Company’s initial
public offering contained materially false and misleading statements and failed to disclose
material facts. Each suit claims violations of Sections 11, 12(a)(2) and/or 15 of the Securities
Act of 1933, and the two later filed suits added claims under Sections 10(b) and 20(a) of the
56
Securities Exchange Act of 1934, as well as the associated Rule 10b-5. In February 2008, two of the
plaintiffs filed competing motions to consolidate the actions and appoint lead plaintiffs and lead
plaintiffs’ counsel. On March 18, 2008, after one of the plaintiffs withdrew his motion, the suits
were consolidated and plaintiffs in the Mirsky v. ULTA action were appointed lead plaintiffs. Lead
plaintiffs have until May 19, 2008 to file an amended consolidated class action complaint.
Although the Company believes that it has meritorious defenses to the claims made in the
consolidated class action and intend to contest the lawsuit vigorously, an adverse resolution may
have a material adverse effect on the Company’s financial position and results of operations in the
period in which the lawsuit is resolved. The Company is not presently able to reasonably estimate
potential losses, if any, related to the lawsuit.
General litigation — The Company is also involved in various legal proceedings that are incidental
to the conduct of its business, including, but not limited to, employment related claims. In the
opinion of management, the amount of any liability with respect to these proceedings, either
individually or in the aggregate, will not be material.
5. Accrued liabilities
Accrued liabilities consist of the following:
| February 2, | February 3, | |||||||
| 2008 | 2007 | |||||||
Accrued payroll, bonus, and employee benefits |
$ | 12,537 | $ | 13,728 | ||||
Accrued vendor liabilities (including accrued
property and equipment costs) |
17,222 | 6,110 | ||||||
Accrued customer liabilities |
8,617 | 6,921 | ||||||
Accrued taxes, other |
5,675 | 4,944 | ||||||
Other accrued liabilities |
10,668 | 6,901 | ||||||
Accrued liabilities |
$ | 54,719 | $ | 38,604 | ||||
6. Income taxes
The provision for income taxes consists of the following:
| Fiscal | Fiscal | Fiscal | ||||||||||
| 2007 | 2006 | 2005 | ||||||||||
Current: |
||||||||||||
Federal |
$ | 18,150 | $ | 15,165 | $ | 11,790 | ||||||
State |
2,369 | 2,102 | 1,562 | |||||||||
Total current |
20,519 | 17,267 | 13,352 | |||||||||
Deferred: |
||||||||||||
Federal |
(3,102 | ) | (2,228 | ) | (2,523 | ) | ||||||
State |
(573 | ) | (808 | ) | (325 | ) | ||||||
Total deferred |
(3,675 | ) | (3,036 | ) | (2,848 | ) | ||||||
Provision for income taxes |
$ | 16,844 | $ | 14,231 | $ | 10,504 | ||||||
A reconciliation of the federal statutory rate to the Company’s effective tax rate is as follows:
| Fiscal | Fiscal | Fiscal | ||||||||||
| 2007 | 2006 | 2005 | ||||||||||
Federal statutory rate |
35.0 | % | 35.0 | % | 35.0 | % | ||||||
State effective rate, net of federal tax benefit |
4.3 | % | 3.4 | % | 4.5 | % | ||||||
Other |
0.6 | % | 0.3 | % | 0.2 | % | ||||||
Effective tax rate |
39.9 | % | 38.7 | % | 39.7 | % | ||||||
57
Significant components of the Company’s deferred tax assets and liabilities are as follows:
| February 2, | February 3, | |||||||
| 2008 | 2007 | |||||||
Deferred tax assets: |
||||||||
Net operating loss carryforwards |
$ | 963 | $ | 1,433 | ||||
Property and equipment |
671 | 633 | ||||||
Accrued liabilities |
1,038 | 946 | ||||||
Inventory valuation |
243 | 86 | ||||||
Employee benefits |
2,315 | 1,350 | ||||||
Vendor allowances |
10,888 | 7,397 | ||||||
Reserves not currently deductible |
767 | 293 | ||||||
Total deferred tax assets |
16,885 | 12,138 | ||||||
Deferred tax liabilities: |
||||||||
Deferred rent obligation |
3,586 | 2,601 | ||||||
Total deferred tax liabilities |
3,586 | 2,601 | ||||||
Net deferred tax asset |
$ | 13,299 | $ | 9,537 | ||||
At February 2, 2008, the Company had net operating loss carryforwards (NOLs) for federal and state
income tax purposes of approximately $2,200 and $4,072, respectively, which expire between 2008 and
2013. Based on Internal Revenue Code Section 382 relating to changes in ownership of the Company,
utilization of the federal NOLs is subject to an annual limitation of $440 for federal NOLs created
prior to April 1, 1997.
The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, on February 4, 2007. The adoption had no effect on the Company’s consolidated
financial position or results of operations. The Company does not currently maintain a liability
for unrecognized tax benefits. The Company’s policy is to recognize income tax-related interest and
penalties as part of income tax expense. Income tax related interest and penalties recorded in the
consolidated financial statements for fiscal 2007, 2006 and 2005 was $22, $2 and $17, respectively.
The Company conducts business only in the United States. Accordingly, the tax years that remain
open to examination by U.S. federal, state, and local tax jurisdictions are generally three years,
or fiscal 2007, 2006 and 2005.
7. Notes payable
The Company’s credit facility is with LaSalle Bank National Association as the administrative
agent, Wachovia Capital Finance Corporation as collateral agent, and JP Morgan Chase Bank as
documentation agent. This facility provides maximum credit of $150,000 and a $50,000 accordion
option through May 31, 2011. The credit facility agreement contains a restrictive financial
covenant on tangible net worth. Substantially all of the Company’s assets are pledged as collateral
for outstanding borrowings under the facility. Outstanding borrowings bear interest at the prime
rate or the Eurodollar rate plus 1.00% up to $100,000 and 1.25% thereafter. The advance rates on
owned inventory are 80% (85% from September 1 to January 31).
The weighted-average interest rate on the outstanding borrowings as of February 2, 2008 and
February 3, 2007, was 4.812% and 7.025%, respectively. At February 2, 2008 and February 3, 2007
outstanding borrowings under this facility have been classified as long-term based on the Company’s
intent and ability to renew borrowings on a long-term basis. The Company had approximately $73,140
and $48,937 of availability as of February 2, 2008 and February 3, 2007, respectively, excluding
the accordion option.
The Company has an ongoing letter of credit that renews annually in October, the balance of which
was $326 as of February 2, 2008 and February 3, 2007.
8. Financial instruments
On December 31, 2001, the Company entered into an interest rate swap agreement with a notional
amount of $25,000 that qualified as a cash flow hedge to obtain a fixed interest rate on variable
rate debt and reduce certain exposures to interest rate fluctuations. The swap expired on December
29, 2006. The swap resulted in fixed rate payments at an interest rate of 5.185%.
58
On January 31, 2007, the Company entered into an interest rate swap agreement under the original
master agreement, with a notional amount of $25,000 and a term of three years with fixed interest
rate payments at an interest rate of 5.11%.
As of February 2, 2008 and February 3, 2007, the interest rate swap had a negative fair value of
$1,184 included in accrued liabilities and a positive fair value of $32 included in other assets,
respectively. The change in market value during fiscal 2007, 2006 and 2005 related to the effective
portion of the cash flow hedges was recorded as an unrecognized gain or loss in the other
comprehensive income (loss) section of stockholders’ equity in the consolidated balance sheets.
Amounts related to any ineffectiveness, which are insignificant, are recorded as interest expense.
Interest rate differentials paid or received under this agreement are recognized as adjustments to
interest expense. The Company does not hold or issue interest rate swap agreements for trading
purposes. In the event that a counter-party fails to meet the terms of the interest rate swap
agreement, the Company’s exposure is limited to the interest rate differential. The Company manages
the credit risk of counterparties by dealing only with institutions that the Company considers
financially sound. The Company considers the risk of non-performance to be remote.
9. Share-based awards
Amended and Restated Restricted Stock Option Plan
The Company has an Amended and Restated Restricted Stock Option Plan (the Amended Plan),
principally to compensate and provide an incentive to key employees and members of the board of
directors, under which it may grant options to purchase common stock. Options
generally are granted with the exercise price equal to the fair value of the underlying stock on
the date of grant. Options vest over four years at the rate of 25% per year from the date of
issuance and must be exercised within the earlier to occur of 14 years from the date of grant or
the maximum period allowed by applicable state law.
2002 Equity Incentive Plan
In April 2002, the Company adopted the 2002 Equity Incentive Plan (the 2002 Plan) 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. Options granted on or after April 26, 2002 and before October 2007, were granted pursuant to the 2002
Plan. The 2002 Plan incorporates several important features that are typically found in agreements
adopted by companies that report their results to the public. First, the maximum term of an option
was reduced from 14 to ten years in order to comply with various state laws. Second, the 2002 Plan
provided more flexibility in the vesting period of options offered to grantees. Third, the 2002
Plan allowed for the offering of incentive stock options to employees in addition to nonqualified
stock options. Unless provided otherwise by the administrator of the 2002 Plan, options vest over
four years at the rate of 25% per year from the date of grant. Options are granted with the
exercise price equal to the fair value of the underlying stock on the date of grant.
2007 Incentive Award Plan
In July 2007, the Company adopted the 2007 Incentive Award Plan (the 2007 Plan). The 2007 Plan
provides for the grant of incentive stock options, nonstatutory stock options, restricted stock,
restricted stock units, stock appreciation rights, and other types of awards to employees,
consultants, and directors. Following its adoption, awards are only being made under the 2007 Plan,
and no further awards will be made under the Amended Plan or the 2002 Plan. The 2007 Plan reserves
for issuance upon grant or exercise of awards up to 4,108 shares of the Company’s common stock plus
any shares which are not issued under the prior plans.
The Company estimated the grant date fair value of stock options using a Black-Scholes valuation
model using the following weighted-average assumptions:
| Fiscal | Fiscal | |||||||
| 2007 | 2006 | |||||||
Volatility rate |
34% — 45% | 45% | ||||||
Average risk-free interest rate |
3.70% — 5.05% | 4.79% | ||||||
Average expected life (years) |
4.6 | 5.5 | ||||||
Dividend yield |
None | None | ||||||
The expected volatility is based on the historical volatility of a peer group of publicly-traded
companies. The risk free interest rate is based on the U.S. 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 be outstanding. The Company has elected to use the shortcut
approach in accordance with SAB No. 107 and 110, to develop the expected life. Any dividend we
might declare in the future would be subject to
59
the applicable provisions of our credit agreement, which currently restricts our ability to pay
cash dividends. The Company recognizes compensation cost related to the stock options on a
straight-line method over the requisite service period.
The Company granted 1,136 stock options during fiscal 2007, the majority of which were granted in
July, 2007. The weighted-average grant date fair value of options granted in fiscal 2007 was $5.64.
At February 2, 2008, there was approximately $6,311 of unrecognized compensation expense related to
unvested stock options. The unrecognized compensation expense is expected to be recognized over a
weighted-average period of approximately two years.
The total fair value of shares vested during fiscal 2007 and 2006 was $5,808 and $3,797,
respectively. The total intrinsic value of options exercised since the Company’s initial public
offering on October 25, 2007 was $2,631.
A summary of the status of the Company’s stock option activity under the Amended Plan, the 2002
Plan and the 2007 Plan is presented in the following tables:
| Common Stock Options | ||||||||||||||||||||||||
| Fiscal 2007 | Fiscal 2006 | Fiscal 2005 | ||||||||||||||||||||||
| Weighted- | Weighted- | Weighted- | ||||||||||||||||||||||
| Average | Average | Average | ||||||||||||||||||||||
| Options outstanding | Shares | Exercise Price | Shares | Exercise Price | Shares | Exercise Price | ||||||||||||||||||
Beginning of year |
4,122 | $ | 3.51 | 6,139 | $ | 1.61 | 6,172 | $ | 1.38 | |||||||||||||||
Granted |
1,136 | 18.58 | 1,330 | 6.21 | 830 | 3.32 | ||||||||||||||||||
Exercised |
(559 | ) | 2.11 | (2,882 | ) | 1.08 | (486 | ) | 0.76 | |||||||||||||||
Canceled |
(55 | ) | 4.85 | (465 | ) | 1.52 | (377 | ) | 2.34 | |||||||||||||||
End of year |
4,644 | $ | 7.35 | 4,122 | $ | 3.51 | 6,139 | $ | 1.61 | |||||||||||||||
Exercisable at end of year |
2,409 | $ | 4.01 | 2,050 | $ | 2.34 | 4,051 | $ | 1.07 | |||||||||||||||
| Preferred Stock Options | ||||||||||||||||||||||||
| Fiscal 2007 | Fiscal 2006 | Fiscal 2005 | ||||||||||||||||||||||
| Weighted- | Weighted- | Weighted- | ||||||||||||||||||||||
| Average | Average | Average | ||||||||||||||||||||||
| Options outstanding | Shares | Exercise Price | Shares | Exercise Price | Shares | Exercise Price | ||||||||||||||||||
Beginning of year |
— | $ | — | — | $ | — | 146 | $ | 0.10 | |||||||||||||||
Exercised |
— | — | — | — | (146 | ) | 0.10 | |||||||||||||||||
End of year |
— | $ | — | — | $ | — | — | $ | — | |||||||||||||||
Exercisable at end of year |
— | $ | — | — | $ | — | — | $ | — | |||||||||||||||
The Company recognized $0, $25 and $169 of stock compensation expense during fiscal 2007, 2006, and
2005, respectively, for options granted during fiscal 2001 and 2002 under the Amended Plan. The
stock compensation charge reflected in the consolidated financial statements represents the
difference at the measurement date between the exercise price and the deemed fair value of the
Common Stock underlying the options. This amount has been fully amortized at February 3, 2007.
Included in the grants for fiscal 2007 and 2006, are 632 and 253 performance-based options,
respectively, whose vesting was contingent upon an initial public offering of the Company’s common
stock. The fair value of these grants was estimated on the date of the grant using the
Black-Scholes valuation model as described above. During fiscal 2007, the Company completed an
initial public offering which resulted in compensation expense of $911 related to these grants.
During fiscal 2006, two former officers of the Company exercised vested options for 284 shares of
common stock, which were immediately repurchased by the Company for $2,489. Compensation expense
was recognized for this amount which represents the excess of the fair value of the common stock
over the exercise price of the options.
Restricted Stock Option Plan—Consultants
During fiscal 1999, the Company established a Restricted Stock Option Plan—Consultants (the
Consultant Plan) under which the Company may grant options to purchase Common Stock to various
consultants who, from time to time, provide critical services to the Company. Options are granted
with the exercise price equal to the fair value of the underlying stock on the date of grant.
Options vest over varying time periods depending on the arrangement with each consultant and must
be exercised within 4 years and 90 days from the date of grant.
60
A summary of the status of the Company’s stock option activity under the Consultant Plan is
presented in the following table:
| Consultant Plan — Common Stock Options | ||||||||||||||||||||||||
| Fiscal 2007 | Fiscal 2006 | Fiscal 2005 | ||||||||||||||||||||||
| Weighted- | Weighted- | Weighted- | ||||||||||||||||||||||
| Average | Average | Average | ||||||||||||||||||||||
| Options outstanding | Shares | Exercise Price | Shares | Exercise Price | Shares | Exercise Price | ||||||||||||||||||
Beginning of year |
— | $ | — | 13 | $ | 1.11 | 53 | $ | 1.11 | |||||||||||||||
Exercised |
— | — | (13 | ) | 1.11 | (40 | ) | 1.11 | ||||||||||||||||
Canceled |
— | — | — | — | — | — | ||||||||||||||||||
End of year |
— | $ | — | — | $ | — | 13 | $ | 1.11 | |||||||||||||||
Exercisable at end of year |
— | $ | — | — | $ | — | — | $ | — | |||||||||||||||
The following table presents information related to options outstanding and options exercisable at
February 2, 2008, under the Amended Plan, the 2002 Plan and the 2007 Plan based on ranges of
exercise prices:
| Options outstanding | Options exercisable | |||||||||||||||||||||||
| Weighted- | Weighted- | |||||||||||||||||||||||
| average | average | |||||||||||||||||||||||
| remaining | Weighted- | remaining | Weighted- | |||||||||||||||||||||
| Number of | contractual life | average | Number | contractual | average | |||||||||||||||||||
| Options outstanding | options | (years) | exercise price | of options | life (years) | exercise price | ||||||||||||||||||
$0.02 - 0.17 |
100 | 5 | $ | 0.17 | 100 | 5 | $ | 0.17 | ||||||||||||||||
0.18 - 1.11 |
393 | 7 | 0.95 | 393 | 7 | 0.95 | ||||||||||||||||||
1.12 - 2.62 |
1,116 | 6 | 2.44 | 952 | 6 | 2.41 | ||||||||||||||||||
2.63 - 4.12 |
1,384 | 9 | 3.73 | 674 | 8 | 3.72 | ||||||||||||||||||
4.13 - 9.18 |
515 | 9 | 9.18 | 129 | 9 | 9.18 | ||||||||||||||||||
9.19 - 15.81 |
642 | 10 | 15.36 | 82 | 10 | 15.81 | ||||||||||||||||||
15.82 - 25.32 |
494 | 10 | 22.78 | 79 | 10 | 25.32 | ||||||||||||||||||
Exercisable at end of year |
4,644 | 8 | $ | 7.35 | 2,409 | 7 | $ | 4.01 | ||||||||||||||||
The aggregate intrinsic value of outstanding and exercisable options as of February 2, 2008 was
$38,946 and $26,992, respectively.
Amended and restated restricted stock plan
During 2004, the Company issued 442 restricted common shares with a fair value of $2.62 per share
at the date of grant to certain directors pursuant to the Amended Plan. The restricted shares
cannot be sold or otherwise transferred during the vesting period, which ranges from three to four
years from the issuance date. The Company retains a reacquisition right in the event the director
ceases to be a member of the board of directors of the Company under certain conditions. The awards
are expensed on a straight-line basis over the vesting period. A summary of restricted stock
activity under the plan is as follows:
| Weighted- | ||||||||
| average | ||||||||
| grant date | ||||||||
| Shares | fair value | |||||||
Nonvested at February 3, 2007 |
52 | $ | 2.62 | |||||
Vested |
50 | 2.62 | ||||||
Nonvested at February 2, 2008 |
2 | $ | 2.62 | |||||
The compensation expense recorded was $131, $293, and $299 in fiscal 2007, 2006, and 2005,
respectively. There was $5 of unrecognized compensation cost related to the restricted shares
granted under the plan at February 2, 2008. The cost is expected to be recognized in fiscal 2008.
61
10. Net income per common share
The following is a reconciliation of net income and the number of shares of common stock used in
the computation of net income per basic and diluted share:
| Fiscal | Fiscal | Fiscal | ||||||||||
| 2007 | 2006 | 2005 | ||||||||||
Numerator for diluted net income per share — net
income |
$ | 25,335 | $ | 22,543 | $ | 15,969 | ||||||
Less preferred stock dividends |
11,219 | 14,584 | 12,922 | |||||||||
Numerator for basic net income per share |
$ | 14,116 | $ | 7,959 | $ | 3,047 | ||||||
Denominator for basic net income per share —
weighted-average common shares |
20,383 | 5,771 | 4,094 | |||||||||
Dilutive effect of stock options and non-vested stock |
2,321 | 2,398 | 2,350 | |||||||||
Dilutive effect of convertible preferred stock |
30,589 | 41,752 | 41,752 | |||||||||
Denominator for diluted net income per share |
53,293 | 49,921 | 48,196 | |||||||||
Net income per common share: |
||||||||||||
Basic |
$ | 0.69 | $ | 1.38 | $ | 0.74 | ||||||
Diluted |
$ | 0.48 | $ | 0.45 | $ | 0.33 | ||||||
The denominator for diluted net income per common share for fiscal years 2007, 2006 and 2005
exclude 1,136, 932 and 820 employee options, respectively, due to their anti-dilutive effects.
During March 2008, the Compensation Committee of the board of directors approved additional option
grants of 1,081.
11. Employee benefit plan
The Company provides a 401(k) retirement plan covering all employees who qualify as to age, length
of service, and hours employed. In fiscal 2007, 2006, and 2005, the plan was funded through
employee contributions and a Company match of 40% up to 3% of eligible compensation. For fiscal
years 2007, 2006 and 2005, the Company match was $408, $300 and $256, respectively.
12. Related-party transactions
During fiscal 1997, 1998, and 2001, certain officers of the Company were issued shares of Series V,
IV, and I Preferred Stock, respectively, in exchange for promissory notes. These notes bear
interest at a rate of 6.85% per annum and were due and payable at the earlier of 90 days after
termination of employment or various dates through November 4, 2007, subject to certain exceptions.
These notes were fully repaid in fiscal 2007.
During fiscal 2006, an officer of the Company exercised stock options in exchange for a promissory
note for $4,094. The note bears interest at a rate of 5.06% per annum and was due at the earlier of
an initial public offering of the Company’s common stock or five years from issuance date. The note
was paid in full on June 29, 2007.
As of February 2, 2008 and February 3, 2007, the outstanding amount on these loans was $0 and
$4,467, respectively. These notes receivable are reflected as a reduction of stockholders’ equity
in the accompanying consolidated balance sheets.
62
13. Valuation and qualifying accounts
| Balance at | Charged to | Balance at | ||||||||||||||
| beginning | costs and | end | ||||||||||||||
| Description | of period | expenses | Deductions | of period | ||||||||||||
Fiscal 2007 |
||||||||||||||||
Allowance for doubtful accounts |
$ | 422 | $ | 298 | $ | (411 | )(a) | $ | 309 | |||||||
Shrink reserve |
1,005 | 3,620 | (2,880 | ) | 1,745 | |||||||||||
Inventory — lower of cost or
market reserve |
701 | 1,561 | (461 | ) | 1,801 | |||||||||||
Fiscal 2006 |
||||||||||||||||
Allowance for doubtful accounts |
224 | 338 | (140 | )(a) | 422 | |||||||||||
Shrink reserve |
722 | 2,003 | (1,720 | ) | 1,005 | |||||||||||
Inventory — lower of cost or
market reserve |
758 | 359 | (416 | ) | 701 | |||||||||||
Fiscal 2005 |
||||||||||||||||
Allowance for doubtful accounts |
55 | 169 | — | 224 | ||||||||||||
Shrink reserve |
829 | 2,246 | (2,353 | ) | 722 | |||||||||||
Inventory — lower of cost or
market reserve |
612 | 758 | (612 | ) | 758 | |||||||||||
| (a) | Represents writeoff of uncollectible accounts. |
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 2007 and fiscal 2006. The Company uses a 13 week (14 week in fourth quarter
fiscal 2006) fiscal quarter ending on the last Saturday of the quarter.
| Fiscal Quarter | ||||||||||||||||||||||||||||||||
| 2007 | 2006 | |||||||||||||||||||||||||||||||
| First | Second | Third | Fourth | First | Second | Third | Fourth | |||||||||||||||||||||||||
Net sales |
$ | 194,113 | $ | 200,449 | $ | 208,235 | $ | 309,344 | $ | 159,468 | $ | 162,558 | $ | 166,075 | $ | 267,012 | ||||||||||||||||
Cost of sales |
134,600 | 141,417 | 140,156 | 212,322 | 108,813 | 113,093 | 115,332 | 182,691 | ||||||||||||||||||||||||
Gross profit |
59,513 | 59,032 | 68,079 | 97,022 | 50,655 | 49,465 | 50,743 | 84,321 | ||||||||||||||||||||||||
Selling, general and
administrative expenses |
47,982 | 51,188 | 55,609 | 70,388 | 41,316 | 39,605 | 40,797 | 66,282 | ||||||||||||||||||||||||
Pre-opening expenses |
1,656 | 2,914 | 4,494 | 2,694 | 826 | 1,601 | 2,901 | 1,768 | ||||||||||||||||||||||||
Operating income |
9,875 | 4,930 | 7,976 | 23,940 | 8,513 | 8,259 | 7,045 | 16,271 | ||||||||||||||||||||||||
Interest expense |
996 | 1,162 | 1,307 | 1,077 | 742 | 715 | 1,031 | 826 | ||||||||||||||||||||||||
Income before income taxes |
8,879 | 3,768 | 6,669 | 22,863 | 7,771 | 7,544 | 6,014 | 15,445 | ||||||||||||||||||||||||
Income tax expense |
3,560 | 1,562 | 2,463 | 9,259 | 3,071 | 2,980 | 2,397 | 5,783 | ||||||||||||||||||||||||
Net income |
$ | 5,319 | $ | 2,206 | $ | 4,206 | $ | 13,604 | $ | 4,700 | $ | 4,564 | $ | 3,617 | $ | 9,662 | ||||||||||||||||
Net income per common share: |
||||||||||||||||||||||||||||||||
Basic |
$ | 0.22 | $ | (0.23 | ) | $ | 0.06 | $ | 0.24 | $ | 0.28 | $ | 0.20 | $ | 0.00 | $ | 0.83 | |||||||||||||||
Diluted |
$ | 0.10 | $ | (0.23 | ) | $ | 0.05 | $ | 0.23 | $ | 0.10 | $ | 0.09 | $ | 0.00 | $ | 0.19 | |||||||||||||||
Due to preferred stock dividends prior to the initial public offering, changes in stock prices
during the year and timing of issuance of shares, the sum of quarterly net income per common share
will not equal the annual net income per common share.
63
Exhibits
| Exhibit | ||
| number | Description of document | |
1.1
|
Form of Underwriting Agreement (incorporated by reference to Exhibit 1.1 to the Company’s Registration Statement on Form S-1 (file No. 333-144405) filed with the Securities and Exchange Commission on October 11, 2007). | |
3.1
|
Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1 (file No. 333-144405) filed with the Securities and Exchange Commission on August 17, 2007). | |
3.2
|
Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1 (file No. 333-144405) filed with the Securities and Exchange Commission on August 17, 2007). | |
4.1
|
Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-1 (file No. 333-144405) filed with the Securities and Exchange Commission on October 11, 2007). | |
4.2
|
Third Amended and Restated Registration Rights Agreement between Ulta Salon, Cosmetics & Fragrance, Inc. and the stockholders party thereto (incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-1 (file No. 333-144405) filed with the Securities and Exchange Commission on August 17, 2007). | |
4.3
|
Stockholder Rights Agreement (incorporated by reference to Exhibit 4.4 to the Company’s Registration Statement on Form S-1 (file No. 333-144405) filed with the Securities and Exchange Commission on August 17, 2007). | |
10.1
|
Employment Agreement, dated as of June 23, 2006, between Ulta Salon, Cosmetics & Fragrance, Inc. and Lyn Kirby (incorporated by reference to Exhibit 10.1 to the Company’s Registration Statement on Form S-1 (file No. 333-144405) filed with the Securities and Exchange Commission on August 17, 2007). | |
10.2
|
Secured Promissory Notes, dated as of June 30, 2006, by Lyn Kirby in favor of Ulta Salon, Cosmetics & Fragrance, Inc. (incorporated by reference to Exhibit 10.2 to the Company’s Registration Statement on Form S-1 (file No. 333-144405) filed with the Securities and Exchange Commission on August 17, 2007). | |
10.3
|
Restricted Stock Agreement, dated as of June 21, 2004 between Ulta Salon, Cosmetics & Fragrance, Inc. and Dennis Eck (incorporated by reference to Exhibit 10.4 to the Company’s Registration Statement on Form S-1 (file No. 333-144405) filed with the Securities and Exchange Commission on August 17, 2007). | |
10.4
|
Restricted Stock Agreement, dated as of June 21, 2004 between Ulta Salon, Cosmetics & Fragrance, Inc. and Robert DiRomualdo (incorporated by reference to Exhibit 10.5 to the Company’s Registration Statement on Form S-1 (file No. 333-144405) filed with the Securities and Exchange Commission on August 17, 2007). | |
10.5
|
Ulta Salon, Cosmetics & Fragrance, Inc. Second Amended and Restated Restricted Stock Option Plan (incorporated by reference to Exhibit 10.7 to the Company’s Registration Statement on Form S-1 (file No. 333-144405) filed with the Securities and Exchange Commission on August 17, 2007). | |
10.5(a)
|
Amendment to Ulta Salon, Cosmetics & Fragrance, Inc. Second Amended and Restated Restricted Stock Option Plan (incorporated by reference to Exhibit 10.7(a) to the Company’s Registration Statement on Form S-1 (file No. 333-144405) filed with the Securities and Exchange Commission on August 17, 2007). | |
10.6
|
Ulta Salon, Cosmetics & Fragrance, Inc. Second Amended and Restated Restricted Stock Plan (incorporated by reference to Exhibit 10.8 to the Company’s Registration Statement on Form S-1 (file No. 333-144405) filed with the Securities and Exchange Commission on August 17, 2007). | |
10.7
|
Ulta Salon, Cosmetics & Fragrance, Inc. 2002 Equity Incentive Plan (incorporated by reference to Exhibit 10.9 to the Company’s Registration Statement on Form S-1 (file No. 333-144405) filed with the Securities and Exchange Commission on August 17, 2007). | |
10.8
|
Ulta Salon, Cosmetics & Fragrance, Inc. 2007 Incentive Award Plan (incorporated by reference to Exhibit 10.10 to the Company’s Registration Statement on Form S-1 (file No. 333-144405) filed with the Securities and Exchange Commission on September 27, 2007). | |
10.9
|
Lease Agreement, dated June 22, 1999, between ULTA3 Cosmetics & Salon, Inc. and 1135 Arbor Drive Investors LLC (incorporated by reference to Exhibit 10.10 to the Company’s Registration Statement on Form S-1 (file No. 333-144405) filed with the Securities and Exchange Commission on August 17, 2007). |
64
| Exhibit | ||
| number | Description of document | |
10.10
|
Lease, dated September 11, 2002, between Ulta Salon, Cosmetics & Fragrance, Inc. and The Prudential Insurance Company of America (incorporated by reference to Exhibit 10.11 to the Company’s Registration Statement on Form S-1 (file No. 333-144405) filed with the Securities and Exchange Commission on August 17, 2007). | |
10.10(a)
|
First Amendment to Lease, dated August 24, 2004, between Ulta Salon, Cosmetics & Fragrance, Inc. and The Prudential Insurance Company of America (incorporated by reference to Exhibit 10.11(a) to the Company’s Registration Statement on Form S-1 (file No. 333-144405) filed with the Securities and Exchange Commission on August 17, 2007). | |
10.11
|
Lease, dated October 31, 2006, between Ulta Salon, Cosmetics & Fragrance, Inc. and The Prudential Insurance Company of America (incorporated by reference to Exhibit 10.12 to the Company’s Registration Statement on Form S-1 (file No. 333-144405) filed with the Securities and Exchange Commission on August 17, 2007). | |
10.12
|
Office Lease, dated as of April 17, 2007, between Ulta Salon, Cosmetics & Fragrance, Inc. and Bolingbrook Investors, LLC (incorporated by reference to Exhibit 10.13 to the Company’s Registration Statement on Form S-1 (file No. 333-144405) filed with the Securities and Exchange Commission on August 17, 2007). | |
10.13
|
Lease, effective as of June 21, 2007, by and between Southwest Valley Partners, LLC and Ulta Salon, Cosmetics & Fragrance, Inc. (incorporated by reference to Exhibit 10.15 to the Company’s Registration Statement on Form S-1 (file No. 333-144405) filed with the Securities and Exchange Commission on September 27, 2007). | |
10.14
|
Third Amendment and Restated Loan and Security Agreement, dated as of June 29, 2007, by and among Ulta Salon, Cosmetics & Fragrance, Inc., LaSalle Bank National Association, Wachovia Capital Finance Corporation (Central) and JPMorgan Chase Bank, N.A. (incorporated by reference to Exhibit 10.15 to the Company’s Registration Statement on Form S-1 (file No. 333-144405) filed with the Securities and Exchange Commission on August 17, 2007). | |
23.1
|
Consent of Independent Registered Public Accounting Firm | |
31.1
|
Certification of the Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2
|
Certification of the Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1
|
Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
65
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Chicago, State of Illinois, on April 16, 2008.
| 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 on behalf of the registrant and in the capacities and on the dates indicated:
| Signatures | Title | Date | ||
/s/ Lynelle P. Kirby
|
President, Chief Executive | April 16, 2008 | ||
Lynelle P. Kirby |
Officer and Director | |||
| (Principal Executive Officer) | ||||
/s/ Gregg R. Bodnar
|
Chief Financial Officer and | April 16, 2008 | ||
Gregg R. Bodnar
|
Assistant Secretary | |||
| (Principal Financial and Accounting Officer) | ||||
/s/ Hervé J.F. Defforey
|
Director | April 16, 2008 | ||
Hervé J.F. Defforey |
||||
/s/ Robert F. DiRomualdo
|
Director | April 16, 2008 | ||
Robert F. DiRomualdo |
||||
/s/ Dennis K. Eck
|
Chairman of the Board of | April 16, 2008 | ||
Dennis K. Eck
|
Directors | |||
/s/ Gerald R. Gallagher
|
Director | April 16, 2008 | ||
Gerald R. Gallagher |
||||
/s/ Terry J. Hanson
|
Director | April 16, 2008 | ||
Terry J. Hanson |
||||
/s/ Charles Heilbronn
|
Director | April 16, 2008 | ||
Charles Heilbronn |
||||
/s/ Steven E. Lebow
|
Director | April 16, 2008 | ||
Steven E. Lebow |
||||
/s/ Yves Sisteron
|
Director | April 16, 2008 | ||
Yves Sisteron |
||||
66