UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended ~~November 2, 2019~~October 31, 2020

☐ 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 BEAUTY, INC.

(Exact name of Registrant as specified in its charter)

incorporation or organization)

Identification No.)

Delaware

(State or other jurisdiction of
incorporation or organization)

38-4022268

(I.R.S. Employer
Identification No.)

1000 Remington Blvd., Suite 120

Bolingbrook, Illinois

(Address of principal executive offices)

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	Trading Symbol	Name of each exchange on which registered
Common Stock, par value $0.01 per share	ULTA	The NASDAQ Global Select Market

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. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

The number of shares of the registrant’s common stock, par value $0.01 per share, outstanding as of ~~December 2, 2019~~November 30, 2020 was ~~57,161,342~~56,338,639 shares.

Table of Contents

ULTA BEAUTY, INC.

TABLE OF CONTENTS


Part I - Financial Information

Item 1. Financial Statements
Consolidated Balance Sheets		3
Consolidated Statements of Operations		4
Consolidated Statements of Comprehensive Income		45
Consolidated Statements of Cash Flows		56
Consolidated Statements of Stockholders’ Equity		67
Notes to Consolidated Financial Statements		89

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		1719

Item 3. Quantitative and Qualitative Disclosures about Market Risk		2631

Item 4. Controls and Procedures		2732

Part II - Other Information		2732

Item 1. Legal Proceedings		2732

Item 1A. Risk Factors		2732

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		2732

Item 3. Defaults Upon Senior Securities		2833

Item 4. Mine Safety Disclosures		2833

Item 5. Other Information		2833

Item 6. Exhibits		2934

SIGNATURES		3035

Table of Contents

Part I - Financial Information

Item 1.Financial Statements

Ulta Beauty, Inc.

Consolidated Balance Sheets

November 2,

February 2,

November 3,
(In thousands, except per share data)

2019

2019

2018
Assets

(Unaudited)

(Unaudited)
Current assets:

Cash and cash equivalents

$
208,843

$
409,251

$
296,944
Receivables, net

112,888

136,168

102,353
Merchandise inventories, net

1,616,920

1,214,329

1,484,565
Prepaid expenses and other current assets

118,343

138,116

119,817
Prepaid income taxes

40,474

16,997

22,294
Total current assets

2,097,468

1,914,861

2,025,973

Property and equipment, net

1,233,412

1,226,029

1,257,775
Operating lease assets

1,529,524

—

—
Goodwill

10,870

10,870

9,084
Other intangible assets, net

3,622

4,317

6,985
Deferred compensation plan assets

26,269

20,511

21,397
Other long-term assets

27,683

14,584

11,477
Total assets

$
4,928,848

$
3,191,172

$
3,332,691

Liabilities and stockholders’ equity

Current liabilities:

Accounts payable

$
594,993

$
404,016

$
574,480
Accrued liabilities

249,112

220,666

255,156
Deferred revenue

190,188

199,054

154,447
Current operating lease liabilities

222,627

—

—
Total current liabilities

1,256,920

823,736

984,083

Non-current operating lease liabilities

1,706,806

—

—
Deferred rent

—

434,980

432,052
Deferred income taxes

83,856

83,864

50,045
Other long-term liabilities

34,110

28,374

30,775
Total liabilities

3,081,692

1,370,954

1,496,955

Commitments and contingencies (Note 7)

Stockholders' equity:

Common stock, $0.01 par value, 400,000 shares authorized; 57,959, 59,232, and 60,108 shares issued; 57,283, 58,584, and 59,461 shares outstanding; at November 2, 2019 (unaudited), February 2, 2019, and November 3, 2018 (unaudited), respectively

580

592

601
Treasury stock-common, at cost

(34,272)

(24,908)

(24,706)
Additional paid-in capital

800,986

738,671

731,890
Retained earnings

1,079,862

1,105,863

1,127,951
Total stockholders’ equity

1,847,156

1,820,218

1,835,736
Total liabilities and stockholders’ equity

$
4,928,848

$
3,191,172

$
3,332,691


	October 31,		February 1,		November 2,
(In thousands, except per share data)	2020		2020		2019
Assets		(Unaudited)				(Unaudited)
Current assets:
Cash and cash equivalents	$	560,902	$	392,325	$	208,843
Short-term investments		—		110,000		—
Receivables, net		136,271		139,337		112,888
Merchandise inventories, net		1,439,098		1,293,701		1,616,920
Prepaid expenses and other current assets		99,810		103,567		118,343
Prepaid income taxes		8,928		16,387		40,474
Total current assets		2,245,009		2,055,317		2,097,468

Property and equipment, net		1,042,262		1,205,524		1,233,412
Operating lease assets		1,510,030		1,537,565		1,529,524
Goodwill		10,870		10,870		10,870
Other intangible assets, net		2,696		3,391		3,622
Deferred compensation plan assets		30,141		27,849		26,269
Other long-term assets		29,986		23,356		27,683
Total assets	$	4,870,994	$	4,863,872	$	4,928,848

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	478,501	$	414,009	$	594,993
Accrued liabilities		268,310		246,088		249,112
Deferred revenue		224,862		237,535		190,188
Current operating lease liabilities		252,171		239,629		222,627
Accrued income taxes		6,499		—		—
Total current liabilities		1,230,343		1,137,261		1,256,920

Non-current operating lease liabilities		1,661,750		1,698,718		1,706,806
Deferred income taxes		89,112		89,367		83,856
Other long-term liabilities		35,352		36,432		34,110
Total liabilities		3,016,557		2,961,778		3,081,692

Commitments and contingencies (Note 8)

Stockholders' equity:
Common stock, $0.01 par value, 400,000 shares authorized; 57,024, 57,285 and 57,959 shares issued; 56,332, 56,609 and 57,283 shares outstanding; at October 31, 2020 (unaudited), February 1, 2020, and November 2, 2019 (unaudited), respectively		570		573		580
Treasury stock-common, at cost		(37,704)		(34,448)		(34,272)
Additional paid-in capital		831,817		807,492		800,986
Retained earnings		1,059,840		1,128,477		1,079,862
Accumulated other comprehensive income (loss)		(86)		—		—
Total stockholders’ equity		1,854,437		1,902,094		1,847,156
Total liabilities and stockholders’ equity	$	4,870,994	$	4,863,872	$	4,928,848

See accompanying notes to consolidated financial statements.

Table of Contents

Ulta Beauty, Inc.

Consolidated Statements of ~~Income~~Operations

(Unaudited)

13 Weeks Ended

39 Weeks Ended

November 2,

November 3,

November 2,

November 3,

(In thousands, except per share data)

2019

2018

2019

2018

Net sales

$
1,682,514

$
1,560,011

$
5,092,150

$
4,591,899

Cost of sales

1,059,081

987,733

3,217,971

2,923,447

Gross profit

623,433

572,278

1,874,179

1,668,452

Selling, general and administrative expenses

449,198

395,453

1,245,174

1,078,219

Pre-opening expenses

6,455

7,612

15,667

17,363

Operating income

167,780

169,213

613,338

572,870

Interest income, net

(900)

(1,318)

(4,617)

(3,786)

Income before income taxes

168,680

170,531

617,955

576,656

Income tax expense

38,933

39,365

134,729

132,771

Net income

$
129,747

$
131,166

$
483,226

$
443,885

Net income per common share:

Basic

$
2.25

$
2.20

$
8.31

$
7.38

Diluted

$
2.25

$
2.18

$
8.27

$
7.35

Weighted average common shares outstanding:

Basic

57,568

59,724

58,123

60,135

Diluted

57,763

60,062

58,396

60,432


	13 Weeks Ended				39 Weeks Ended
	October 31,		November 2,		October 31,		November 2,
(In thousands, except per share data)	2020		2019		2020		2019
Net sales	$	1,552,033	$	1,682,514	$	3,953,252	$	5,092,150
Cost of sales		1,006,514		1,059,081		2,775,121		3,217,971
Gross profit		545,519		623,433		1,178,131		1,874,179

Selling, general and administrative expenses		416,378		449,198		1,068,877		1,245,174
Impairment, restructuring and other costs		23,624		—		83,924		—
Pre-opening expenses		4,240		6,455		12,782		15,667
Operating income		101,277		167,780		12,548		613,338
Interest expense (income), net		1,383		(900)		5,272		(4,617)
Income before income taxes		99,894		168,680		7,276		617,955
Income tax expense		25,096		38,933		2,935		134,729
Net income	$	74,798	$	129,747	$	4,341	$	483,226

Net income per common share:
Basic	$	1.33	$	2.25	$	0.08	$	8.31
Diluted	$	1.32	$	2.25	$	0.08	$	8.27

Weighted average common shares outstanding:
Basic		56,327		57,568		56,355		58,123
Diluted		56,546		57,763		56,524		58,396

See accompanying notes to consolidated financial statements.

Table of Contents

Ulta Beauty, Inc.

Consolidated Statements of Comprehensive Income

(Unaudited)


	13 Weeks Ended				39 Weeks Ended
	October 31,		November 2,		October 31,		November 2,
(In thousands)	2020		2019		2020		2019
Net income	$	74,798	$	129,747	$	4,341	$	483,226
Other comprehensive income (loss):
Foreign currency translation adjustments		(116)		—		(86)		—
Comprehensive income	$	74,682	$	129,747	$	4,255	$	483,226

See accompanying notes to consolidated financial statements.

Table of Contents

Ulta Beauty, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

39 Weeks Ended

November 2,

November 3,

(In thousands)

2019

2018

Operating activities

Net income

$
483,226

$
443,885

Adjustments to reconcile net income to net cash provided by operating activities:


Depreciation and amortization

219,207

207,652

Non-cash lease expense

219,220

—

Deferred income taxes

(8)

(408)

Stock-based compensation expense

19,108

20,308

Loss on disposal of property and equipment

4,821

1,339

Change in operating assets and liabilities:

Receivables

5,812

(2,594)

Merchandise inventories

(402,591)

(388,141)

Prepaid expenses and other current assets

(5,487)

(19,603)

Income taxes

(23,477)

(34,906)

Accounts payable

190,977

248,719

Accrued liabilities

23,109

42,151

Deferred revenue

(8,866)

1,963

Operating lease liabilities

(198,181)

—

Deferred rent

—

24,136

Other assets and liabilities

30,636

(2,287)

Net cash provided by operating activities

557,506

542,214

Investing activities

Purchases of short-term investments

(245,000)

(386,193)

Proceeds from short-term investments

245,000

506,193

Purchases of property and equipment

(241,136)

(256,415)

Acquisitions, net of cash acquired

—

(13,606)

Purchases of equity investments

(43,757)

—

Net cash used in investing activities

(284,893)

(150,021)

Financing activities

Repurchase of common shares

(506,868)

(379,423)

Stock options exercised

43,211

12,668

Purchase of treasury shares

(9,364)

(5,939)

Net cash used in financing activities

(473,021)

(372,694)

Net increase (decrease) in cash and cash equivalents

(200,408)

19,499

Cash and cash equivalents at beginning of period

409,251

277,445

Cash and cash equivalents at end of period

$
208,843

$
296,944

Supplemental cash flow information

Cash paid for income taxes (net of refunds)

$
126,719

$
168,087

Non-cash investing activities:

Change in property and equipment included in accrued liabilities

$
6,797

$
21,611


	39 Weeks Ended
	October 31,		November 2,
(In thousands)	2020		2019
Operating activities
Net income	$	4,341	$	483,226
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		226,386		219,207
Non-cash lease expense		196,354		219,220
Long-lived asset impairment charge		69,932		—
Deferred income taxes		(255)		(8)
Stock-based compensation expense		22,979		19,108
Loss on disposal of property and equipment		5,219		4,821
Change in operating assets and liabilities:
Receivables		3,066		5,812
Merchandise inventories		(145,397)		(402,591)
Prepaid expenses and other current assets		3,007		(5,487)
Income taxes		13,958		(23,477)
Accounts payable		62,337		190,977
Accrued liabilities		24,582		23,109
Deferred revenue		(12,673)		(8,866)
Operating lease liabilities		(212,665)		(198,181)
Other assets and liabilities		(2,126)		30,636
Net cash provided by operating activities		259,045		557,506

Investing activities
Purchases of short-term investments		—		(245,000)
Proceeds from short-term investments		110,000		245,000
Capital expenditures		(116,745)		(241,136)
Acquisitions, net of cash acquired		(1,220)		—
Purchases of equity investments		(5,665)		(43,757)
Net cash used in investing activities		(13,630)		(284,893)

Financing activities
Proceeds from long-term debt		800,000		—
Payments on long-term debt		(800,000)		—
Repurchase of common shares		(72,981)		(506,868)
Stock options exercised		1,346		43,211
Purchase of treasury shares		(3,256)		(9,364)
Debt issuance costs		(1,861)		—
Net cash used in financing activities		(76,752)		(473,021)

Effect of exchange rate changes on cash and cash equivalents		(86)		—
Net increase (decrease) in cash and cash equivalents		168,577		(200,408)
Cash and cash equivalents at beginning of period		392,325		409,251
Cash and cash equivalents at end of period	$	560,902	$	208,843

Supplemental information
Cash paid for interest	$	701	$	—
Income taxes paid, net of refunds		8,100		126,719
Non-cash capital expenditures		27,916		44,271

See accompanying notes to consolidated financial statements.

Table of Contents

Ulta Beauty, Inc.

Consolidated Statements of Stockholders’ Equity

(Unaudited)


				Treasury -							Accumulated
	Common Stock			Common Stock			Additional				Other		Total
	Issued			Treasury			Paid-In		Retained		Comprehensive		Stockholders'
(In thousands)	Shares	Amount		Shares	Amount		Capital		Earnings		Income (Loss)		Equity
Balance – February 1, 2020	57,285	$	573	(676)	$	(34,448)	$	807,492	$	1,128,477	$	—	$	1,902,094
Net loss	—		—	—		—		—		(78,509)		—		(78,509)
Stock-based compensation	—		—	—		—		6,182		—		—		6,182
Foreign currency translation adjustments	—		—	—		—		—		—		(75)		(75)
Stock options exercised and other awards	45		—	—		—		250		—		—		250
Purchase of treasury shares	—		—	(15)		(3,002)		—		—		—		(3,002)
Repurchase of common shares	(327)		(3)	—		—		—		(72,978)		—		(72,981)
Balance – May 2, 2020	57,003	$	570	(691)	$	(37,450)	$	813,924	$	976,990	$	(75)	$	1,753,959
Net income	—		—	—		—		—		8,052		—		8,052
Stock-based compensation	—		—	—		—		8,413		—		—		8,413
Foreign currency translation adjustments	—		—	—		—		—		—		105		105
Stock options exercised and other awards	11		—	—		—		327		—		—		327
Purchase of treasury shares	—		—	—		(63)		—		—		—		(63)
Balance – August 1, 2020	57,014	$	570	(691)	$	(37,513)	$	822,664	$	985,042	$	30	$	1,770,793
Net income	—		—	—		—		—		74,798		—		74,798
Stock-based compensation	—		—	—		—		8,384		—		—		8,384
Foreign currency translation adjustments	—		—	—		—		—		—		(116)		(116)
Stock options exercised and other awards	10		—	—		—		769		—		—		769
Purchase of treasury shares	—		—	(1)		(191)		—		—		—		(191)
Balance – October 31, 2020	57,024	$	570	(692)	$	(37,704)	$	831,817	$	1,059,840	$	(86)	$	1,854,437

See accompanying notes to consolidated financial statements.

Table of Contents

Ulta Beauty, Inc.

Consolidated Statements of Stockholders’ Equity

(Unaudited)


				Treasury -
	Common Stock			Common Stock			Additional				Total
	Issued			Treasury			Paid-In		Retained		Stockholders'
(In thousands)	Shares	Amount		Shares	Amount		Capital		Earnings		Equity
Balance – February 2, 2019	59,232	$	592	(648)	$	(24,908)	$	738,671	$	1,105,863	$	1,820,218
Net income	—		—	—		—		—		192,221		192,221
Stock-based compensation	—		—	—		—		6,030		—		6,030
Adoption of accounting standards - ASC 842	—		—	—		—		—		(2,375)		(2,375)
Stock options exercised and other awards	348		4	—		—		42,052		—		42,056
Purchase of treasury shares	—		—	(27)		(9,183)		—		—		(9,183)
Repurchase of common shares	(318)		(3)	—		—		—		(107,396)		(107,399)
Balance – May 4, 2019	59,262	$	593	(675)	$	(34,091)	$	786,753	$	1,188,313	$	1,941,568
Net income	—		—	—		—		—		161,258		161,258
Stock-based compensation	—		—	—		—		6,736		—		6,736
Stock options exercised and other awards	15		—	—		—		879		—		879
Purchase of treasury shares	—		—	—		(89)		—		—		(89)
Repurchase of common shares	(792)		(8)	—		—		—		(270,893)		(270,901)
Balance – August 3, 2019	58,485	$	585	(675)	$	(34,180)	$	794,368	$	1,078,678	$	1,839,451
Net income	—		—	—		—		—		129,747		129,747
Stock-based compensation	—		—	—		—		6,342		—		6,342
Stock options exercised and other awards	4		—	—		—		276		—		276
Purchase of treasury shares	—		—	(1)		(92)		—		—		(92)
Repurchase of common shares	(530)		(5)	—		—		—		(128,563)		(128,568)
Balance – November 2, 2019	57,959	$	580	(676)	$	(34,272)	$	800,986	$	1,079,862	$	1,847,156

See accompanying notes to consolidated financial statements.

~~Table of Contents~~

~~Ulta Beauty, Inc.~~

~~Consolidated Statements of Stockholders’ Equity~~

~~(Unaudited)~~

Treasury -

Common Stock

Common Stock

Additional

Total

Issued

Treasury

Paid-In

Retained

Stockholders'
(In thousands)

Shares

Amount

Shares

Amount

Capital

Earnings

Equity
Balance – February 3, 2018

61,441

$
614

(619)

$
(18,767)

$
698,917

$
1,093,453

$
1,774,217
Net income

—

—

—

—

—

164,396

164,396
Stock-based compensation

—

—

—

—

6,170

—

6,170
Adoption of accounting standards - ASC 606

—

—

—

—

—

(29,980)

(29,980)
Stock options exercised and other awards

176

2

—

—

6,510

—

6,512
Purchase of treasury shares

—

—

(23)

(4,831)

—

—

(4,831)
Repurchase of common shares

(619)

(6)

—

—

—

(133,045)

(133,051)
Balance – May 5, 2018

60,998

$
610

(642)

$
(23,598)

$
711,597

$
1,094,824

$
1,783,433
Net income

—

—

—

—

—

��
148,323

148,323
Stock-based compensation

—

—

—

—

7,002

—

7,002
Stock options exercised and other awards

32

—

—

—

1,936

—

1,936
Purchase of treasury shares

—

—

(4)

(815)

—

—

(815)
Repurchase of common shares

(512)

(5)

—

—

—

(127,396)

(127,401)
Balance – August 4, 2018

60,518

$
605

(646)

$
(24,413)

$
720,535

$
1,115,751

$
1,812,478
Net income

—

—

—

—

—

131,166

131,166
Stock-based compensation

—

—

—

—

7,136

—

7,136
Stock options exercised and other awards

41

1

—

—

4,219

—

4,220
Purchase of treasury shares

—

—

(1)

(293)

—

—

(293)
Repurchase of common shares

(451)

(5)

—

—

—

(118,966)

(118,971)
Balance – November 3, 2018

60,108

$
601

(647)

$
(24,706)

$
731,890

$
1,127,951

$
1,835,736

~~See accompanying notes to consolidated financial statements.~~

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Ulta Beauty, Inc.

Notes to Consolidated Financial Statements

(In thousands, except per share and store count data) (Unaudited)

1.Business and basis of presentation

On January 29, 2017, Ulta Salon, Cosmetics & Fragrance, Inc. implemented a holding company reorganization. Pursuant to the reorganization, Ulta Beauty, Inc., which was incorporated as a Delaware corporation in December 2016, became the successor to Ulta Salon, Cosmetics & Fragrance, Inc., the former publicly-traded company and now a wholly owned subsidiary of Ulta Beauty, Inc. As used in these notes and throughout this Quarterly Report on Form 10-Q, all references to “we,” “us,” “our,” “Ulta Beauty,” or the “Company” refer to Ulta Beauty, Inc. and its consolidated subsidiaries.

The Company was originally founded in 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 ~~November 2, 2019,~~October 31, 2020, the Company operated ~~1,241~~1,262 stores across 50 states, as shown in the table below.


	Number of		Number of	Number of		Number of
Location	stores	Location	stores	stores	Location	stores
Alabama	21	Montana	6	22	Montana	6
Alaska	3	Nebraska	5	3	Nebraska	5
Arizona	28	Nevada	15	30	Nevada	15
Arkansas	10	New Hampshire	7	10	New Hampshire	7
California	159	New Jersey	38	156	New Jersey	41
Colorado	26	New Mexico	7	26	New Mexico	7
Connecticut	16	New York	50	17	New York	49
Delaware	3	North Carolina	34	3	North Carolina	34
Florida	84	North Dakota	3	86	North Dakota	3
Georgia	38	Ohio	43	38	Ohio	43
Hawaii	4	Oklahoma	20	4	Oklahoma	21
Idaho	9	Oregon	14	9	Oregon	17
Illinois	55	Pennsylvania	45	55	Pennsylvania	44
Indiana	24	Rhode Island	3	24	Rhode Island	3
Iowa	10	South Carolina	20	10	South Carolina	20
Kansas	13	South Dakota	2	13	South Dakota	3
Kentucky	14	Tennessee	26	15	Tennessee	27
Louisiana	18	Texas	112	18	Texas	117
Maine	3	Utah	14	3	Utah	14
Maryland	25	Vermont	1	27	Vermont	1
Massachusetts	21	Virginia	29	21	Virginia	30
Michigan	49	Washington	36	48	Washington	34
Minnesota	17	West Virginia	7	18	West Virginia	7
Mississippi	9	Wisconsin	20	10	Wisconsin	20
Missouri	23	Wyoming	2	25	Wyoming	3
		Total	1,241		Total	1,262

The accompanying unaudited consolidated financial statements and related notes have been prepared in accordance with U.S. generally accepted accounting principles ~~(GAAP)~~ for interim financial information and with the instructions to Form 10-Q and the U.S. Securities and Exchange Commission’s Article 10, Regulation S-X. These financial statements were prepared on a consolidated basis to include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts, transactions, and unrealized profit were eliminated in consolidation. In the opinion of management, the accompanying consolidated financial statements reflect all adjustments, which are of a normal

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recurring nature, necessary to fairly state the financial position and results of operations and cash flows for the interim periods presented.

The novel coronavirus (COVID-19) pandemic has had, and will continue to have, a negative impact on the Company’s business, financial condition, profitability, cash flows, and supply chain, although the full extent is uncertain. See Note 3, “Impact of the COVID-19 pandemic,” for additional details. In addition, the Company’s business is subject to seasonal ~~fluctuation. Significant~~fluctuation, with significant portions of the Company’s net sales and net income ~~are~~being realized during the fourth quarter of the fiscal year due to the holiday selling season. ~~The~~As a result, the results for the 13 and 39 weeks ended ~~November 2, 2019~~October 31, 2020 are not necessarily indicative of the results to be expected for the fiscal year ending ~~February 1, 2020,~~January 30, 2021, or for any other future interim period or for any future year.

These interim consolidated financial statements and the related notes should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended February ~~2, 2019.~~1, 2020. All amounts are stated in thousands, with the exception of per share amounts and number of stores.

2.Summary of significant accounting policies

Information regarding the Company’s significant accounting policies is contained in Note 2, “Summary of significant accounting policies,” to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended February ~~2, 2019.~~1, 2020. Presented below and in the following notes is supplemental information that should be read in conjunction with “Notes to Consolidated Financial Statements” in the Annual Report.

Fiscal quarter

The Company’s quarterly periods are the 13 weeks ending on the Saturday closest to April 30, July 31, October 31, and January 31. The Company’s third quarter in fiscal ~~2019~~2020 and ~~2018~~2019 ended on October 31, 2020 and November 2, 2019, ~~and November 3, 2018,~~ respectively.

~~Reclassifications~~Use of estimates

~~Certain prior year~~The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts ~~have been reclassified~~of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the accounting period. The Company considers its accounting policies relating to ~~conform~~inventory valuations, vendor allowances, impairment of long-lived tangible and operating lease assets, loyalty program and income taxes to be the ~~current year presentation.~~most significant accounting policies that involve management estimates and judgments. The COVID-19 pandemic has created and may continue to create significant uncertainty in macroeconomic conditions, which may cause further business disruptions and adversely impact the Company’s results of operations. While the full impact of the COVID-19 pandemic is unknown and cannot be reasonably estimated, the Company has made accounting estimates based on the facts and circumstances available as of the reporting date. Actual amounts could differ from these estimates, and such differences could be material.

Recent accounting pronouncements not yet adopted

~~Intangibles~~Taxes – ~~Goodwill and Other-Internal-Use Software~~Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.

In ~~August 2018,~~December 2019, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2019-12, Income Taxes – Simplifying the Accounting for Income Taxes. The guidance removes certain exceptions for recognizing deferred taxes for equity method investments, performing intraperiod allocation, and calculating income taxes in interim periods. The ASU also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for goodwill and allocating taxes to members of a consolidated group, among others. This guidance is effective for interim and annual reporting periods beginning after December 15, 2020. Early adoption of the standard is permitted, including adoption in interim or annual periods for which financial statements have not yet been issued. The transition requirements are dependent upon each amendment within this update and will be applied either prospectively or retrospectively. The adoption of ASU 2019-12 is not expected to have a material impact on the Company’s consolidated financial position, results of operations, or cash flows.

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Recently adopted accounting pronouncements

Intangibles – Goodwill and Other-Internal-Use Software. In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customers Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract, which clarifies and aligns the accounting for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This guidance is effective for interim and annual reporting periods beginning after December 15, 2019 and should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. Early adoption is permitted. The Company adopted the new guidance prospectively as of February 2, 2020, and its adoption ~~of ASU 2018-15 is~~did not ~~expected to~~ have a material impact on the Company’s consolidated financial position, results of operations, or cash flows.

~~Recently adopted accounting pronouncements~~3.Impact of the COVID-19 pandemic

~~Leases~~

In ~~February 2016,~~March 2020, the ~~FASB issued ASU 2016-02, Leases (Topic 842). The guidance~~World Health Organization declared COVID-19 a global pandemic. In response to federal, state, and local government restrictions and recommendations and for the health and safety of our associates and guests, the Company temporarily closed all stores effective March 19, 2020. Effective April 19, 2020, the Company temporarily furloughed many store and salon associates and introduced curbside pickup, and on May 11, 2020, the Company started a phased store reopening process. By July 20, 2020, the full fleet of Ulta Beauty stores was operational. By October 31, 2020, salon and brow services had resumed in ~~ASU 2016-02~~almost all stores. Reflecting operational limitations related to COVID-19 and ~~subsequently issued amendments requires lessees to capitalize virtually all leases with terms~~the partial resumption of services, the Company has reactivated more than ~~twelve months~~half of the furloughed associates.

Results of operations for the 13 and 39 weeks ended October 31, 2020 were significantly impacted by the effects of COVID-19, and the pandemic is expected to continue to have a negative impact on the ~~balance sheet as a right-of-use asset~~Company’s business, financial condition, profitability, cash flows, and ~~recognize an associated lease liability. The right-of-use asset represents~~supply chain, although the ~~lessee’s right~~full extent is uncertain. As COVID-19 continues to ~~use, or control~~evolve and resurgences occur, the ~~use~~extent of ~~a specified asset for~~ the ~~specified lease term. The lease liability represents~~impact on the ~~lessee’s obligation~~Company’s business, financial condition, profitability, cash flows, and supply chain will depend on future developments, including, but not limited to, ~~make lease payments arising from~~ the ~~lease, measured on a discounted basis. Based~~potential temporary reclosing of certain stores, the potential temporary restrictions on certain ~~characteristics, leases~~store operating hours and/or in-store capacity, the duration of potential future quarantines, shelter-in-place and other travel restrictions within the U.S. and other affected countries, the severity of the virus, the duration and spread of the virus, the duration, timing and severity of the impact on consumer spending, how quickly and to what extent normal economic and operating conditions can resume, and the public’s response to resurgences of the virus and its eventual aftermath, all of which are ~~classified as financing~~highly uncertain and cannot be predicted.

The multi-year, strategic investments the Company has made to enhance omnichannel and supply chain capabilities, combined with the ongoing commitment of the Company’s distribution associates, have enabled the Company to support increased e-commerce demand and guest engagement.

The Company has taken the following steps to preserve financial liquidity through these unprecedented circumstances:

●

the drawdown of $800,000 on March 18, 2020 under the Company’s revolving credit facility, which was repaid in full on September 2, 2020;

●

limited new hires and delayed merit increases for all corporate, store, and salon associates;

●

reduced marketing, travel and controllable expenses;

●

aligned inventory receipts with current sales trends;

●

prioritized payment obligations;

●

reduced new store openings, relocations and remodel projects; and

●

suspended the Company’s stock repurchase program, which may be resumed in the fourth quarter of fiscal 2020.

The Company evaluates long-lived assets for indicators of impairment quarterly or ~~operating leases~~when events or changes in circumstances indicate that their carrying amounts may not be recoverable. As a result of the COVID-19 pandemic, the Company experienced lower than projected revenues and ~~their classification impacts the recognition~~identified indicators of ~~expense~~impairment for certain stores, which resulted in the ~~income statement. Entities are allowed to apply the modified retrospective approach (1) retrospectively to~~recording of certain long-lived asset impairment and restructuring charges. See Note 5, “Impairment, restructuring and other costs,” for additional details.

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~~each comparative period presented or (2) retrospectively at~~CARES Act

On March 27, 2020, the ~~beginning of the period of adoption through a cumulative-effect adjustment.~~

Coronavirus Aid, Relief and Economic Security (CARES) Act was enacted. The Company adopted the new standard on February 3, 2019 using the modified retrospective approach by recognizing and measuring leases without revising comparative period information or disclosures. The Company elected the transition package of three practical expedients permitted within the standard, whichCARES Act, among other things, includes provisions relating to refundable payroll taxes, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. The most significant relief measures which the Company qualifies for are the employee retention credit, payroll tax deferral, and technical corrections to tax depreciation.

The Company recognizes government grants for which there is a reasonable assurance of compliance with grant conditions and receipt of credits. The Company believes there is a reasonable assurance that it will comply with the relevant conditions of the employee retention credit provision of the CARES Act and that it will receive the credit. The Company will continue to assess the treatment of the CARES Act to the extent additional guidance and regulations are issued, the further applicability of the CARES Act to the Company, and the potential impacts on the business.

Employee retention credit (ERC) and payroll tax deferral. The ERC allows for a refundable tax credit against certain employment taxes equal to 50% of the ~~carryforward of historical lease classifications. In addition,~~first ten thousand dollars in qualified wages paid to each employee commencing on March 13, 2020 and through January 1, 2021. To be eligible, the Company ~~elected~~must (i) have had operations fully or partially suspended because of a shut-down order from a governmental authority related to ~~apply~~COVID-19, or (ii) have had gross receipts decline by more than 50% in a calendar quarter when compared to the ~~practical expedient that allows for~~same quarter in 2019. Qualified wages are limited to wages paid to employees who were not providing services due to the ~~combination~~COVID-19 pandemic. During the 13 and 39 weeks ended October 31, 2020, the Company recognized $2,402 and $50,583, respectively, related to the ERC as a reduction of ~~lease~~the associated costs within selling, general and ~~non-lease components for all asset classes. The Company made an accounting policy election to keep leases with terms~~administrative expenses on the consolidated statements of ~~twelve months or less off the balance sheet~~operations and ~~recognize those lease payments~~within accounts receivable, net on ~~a straight-line basis over the lease term.~~

~~The adoption of ASU 2016-02 resulted in the recording of operating lease assets and liabilities of $1,460,866 and $1,839,970 within~~ the consolidated balance ~~sheet, respectively, as of February 3, 2019. As part~~sheets.

Additionally, the CARES Act contains provisions for deferral of the ~~adoption,~~employer portion of social security taxes incurred through the end of calendar 2020. As of October 31, 2020, the Company has deferred $34,060 in social security tax payments, of which 50% are required to be remitted by December 2021 and the remaining 50% by December 2022. The deferred amounts are recorded ~~an adjustment to retained earnings of $2,375. The standard did not materially impact~~as a liability within accrued liabilities on the Company’s consolidated ~~results~~balance sheets.

Technical corrections to tax depreciation. The CARES Act also includes a technical correction of ~~operations~~tax depreciation methods for qualified improvement property, which changes 39-year property to 15-year property eligible for 100% tax bonus depreciation. This provision of the CARES Act resulted in a cash tax refund of $4,600 relating to property and ~~had no impact on cash flows. See Note 6, “Leases,” for further details.~~

~~The impact to the Company’s opening consolidated balance sheet~~equipment, from filing an amended federal income tax return, as of ~~February 3, 2019 was as follows:~~October 31, 2020. Furthermore, the Company expects the changes to qualified impairment property depreciation to result in reductions to estimated income tax payments for fiscal 2020.

As Reported

Effect of Adopting

Balance at
(In thousands)

February 2, 2019

ASC 842

February 3, 2019
Assets

(Unaudited)
Receivables, net

$
136,168

$
(17,468)

$
118,700
Prepaid expenses and other current assets

138,116

(25,260)

112,856
Property and equipment, net

1,226,029

(16,983)

1,209,046
Operating lease assets

—

1,460,866

1,460,866
Liabilities and stockholders’ equity

Accrued liabilities

220,666

(1,460)

219,206
Current operating lease liabilities

—

210,721

210,721
Deferred rent

434,980

(434,980)

—
Non-current operating lease liabilities

—

1,629,249

1,629,249
Retained earnings

1,105,863

(2,375)

1,103,488

3.~~Acquisitions~~

The Company continues to make investments to evolve the customer experience, with a strong emphasis on integrating technology across the business. To support these efforts, the Company paid $13,606 to acquire 2 technology companies in fiscal 2018.

~~On September 10, 2018, the Company acquired QM Scientific, an artificial intelligence technology company. The acquisition was not material to the Company’s consolidated financial statements.~~

~~On October 29, 2018, the Company acquired GlamST, an augmented reality technology company. The acquisition was not material to the Company’s consolidated financial statements.~~

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4.Revenue

The Company’s net sales include retail stores and e-commerce merchandise sales as well as salon services and other revenue. Other revenue sources include the private label ~~credit card~~ and co-branded credit card programs, as well as deferred revenue related to the loyalty program and gift card breakage.

Disaggregated revenue

The following table sets forth the approximate percentage of net sales by primary category:


	13 Weeks Ended		39 Weeks Ended		13 Weeks Ended		39 Weeks Ended
(Percentage of net sales)	November 2, 2019	November 3, 2018	November 2, 2019	November 3, 2018	October 31, 2020	November 2, 2019	October 31, 2020	November 2, 2019
Cosmetics	51%	53%	50%	52%	45%	51%	46%	50%
Skincare, Bath & Fragrance	21%	19%	21%	20%
Haircare Products & Styling Tools	18%	19%	19%	19%
Skincare, bath, and fragrance					26%	21%	26%	21%
Haircare products and styling tools					21%	18%	20%	19%
Services	6%	6%	6%	6%	4%	6%	4%	6%
Other (nail products, accessories, and other)	4%	3%	4%	3%	4%	4%	4%	4%
	100%	100%	100%	100%	100%	100%	100%	100%

Deferred revenue

Deferred revenue primarily represents contract liabilities for the Company’s obligation to transfer additional goods or services to a guest for which the Company has received consideration, such as unredeemed Ultamate Rewards loyalty points and unredeemed Ulta Beauty gift cards. In addition, the Company recognizes breakage on gift cards proportionately as redemption occurs.

The following table provides a summary of the changes included in deferred revenue:


	13 Weeks Ended				39 Weeks Ended				13 Weeks Ended				39 Weeks Ended
	November 2, 2019		November 3, 2018		November 2, 2019		November 3, 2018
(In thousands)									October 31, 2020		November 2, 2019		October 31, 2020		November 2, 2019
Beginning balance	$	171,953	$	130,616	$	193,585	$	110,103	$	207,746	$	171,953	$	230,011	$	193,585
Adoption of ASC 606		—		—		—		38,773
Additions to contract liabilities (1)		66,167		55,032		145,728		78,339		40,932		66,167		128,402		145,728
Deductions to contract liabilities (2)		(62,816)		(50,052)		(164,009)		(91,619)		(39,032)		(62,816)		(148,767)		(164,009)
Ending balance	$	175,304	$	135,596	$	175,304	$	135,596	$	209,646	$	175,304	$	209,646	$	175,304

(1)	Loyalty points and gift cards issued in the current period but not redeemed or expired.

(2)	Revenue recognized in the current period related to the beginning liability.

Other amounts included in deferred revenue were $15,216 and $14,884 at October 31, 2020 and November 2, 2019, respectively.

5.Impairment, restructuring and other costs

Impairment of long-lived tangible assets

The asset group is defined as the lowest level for which identifiable cash flows are available and largely independent of the cash flows of other groups of assets. The asset group identified is at the store level and includes both property and equipment and operating lease assets.

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Significant estimates are used in determining future cash flows of each store over its remaining lease term including our expectations of future projected cash flows including revenues, operating expenses, and market conditions. An impairment loss is recorded if the carrying amount of the long-lived asset exceeds its fair value.

The Company evaluates long-lived assets for indicators of impairment quarterly or when events or changes in circumstances indicate that their carrying amounts may not be recoverable. The Company performs an undiscounted cash flow analysis over the long-lived assets. Asset groups are written down only to the extent that their carrying value is lower than their respective fair value. Fair values of the asset group are determined by discounting the cash flows at a rate that approximates the cost of capital of a market participant. Management’s forecast of future cash flows is based on the income approach. The fair value of individual operating lease assets is determined using estimated market rent assessments.

As a result of the COVID-19 pandemic, the Company experienced lower than projected revenues and identified indicators of impairment for certain stores. The Company’s analysis indicated that the carrying values of certain long-lived assets exceeded their respective fair values. As a result, the Company recognized an impairment charge of $40,428 for the 26 weeks ended August 1, 2020. There were 0 asset impairment charges recognized during the 13 weeks ended October 31, 2020. These charges are recorded in impairment, restructuring and other costs in the consolidated statements of operations. These impairment charges were primarily driven by lower than projected revenues, lower market rate assessments, and the effect of temporary store closures as a result of the COVID-19 pandemic.

The determination of estimated market rent used in the fair value estimate of the Company’s operating lease assets included within the respective store asset group requires significant management judgment. Changes in these estimates could have a significant impact on whether long-lived store assets should be further evaluated for impairment and could have a significant impact on the resulting impairment charge.

The significant estimates, all of which are considered Level 3 inputs, used in the fair value methodology include: the Company’s expectations for future operations and projected cash flows, including revenues, operating expenses, and market conditions.

Restructuring and other costs

The following table provides a summary of the restructuring and other charges included in impairment, restructuring and other costs in the consolidated statements of operations:


	13 Weeks Ended		39 Weeks Ended
	October 31,		October 31,
(In thousands)	2020		2020
Store Closures
Long-lived asset impairment charges (1)	$	—	$	19,569
Lease termination costs		1,844		1,844
Severance (2)		186		489
Suspension of Canadian expansion
Long-lived asset impairment charges (1)	$	9,935	$	9,935
Lease termination costs		5,317		5,317
Severance (2)		634		634
Other Severance (2)	$	5,708	$	5,708
Total	$	23,624	$	43,496

(1)	The significant estimates, all of which are considered Level 3 inputs, used in the fair value methodology include: the Company’s expectations for future operations and projected cash flows, including revenues, operating expenses, and market conditions.

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(2)	As of October 31, 2020, the Company's restructuring accrual recorded in accrued liabilities on the consolidated balance sheets was $6,202 and is primarily for severance.

Store closures. During the second quarter of fiscal 2020, the Company announced that after evaluating its store portfolio, it would permanently close 19 stores in the third quarter of fiscal 2020. Accordingly, for the 13 and 39 weeks ended October 31, 2020, the Company recognized restructuring charges related to store closures of $2,030 and $21,902, respectively. There were 0 related restructuring charges for the 13 and 39 weeks ended November 2, 2019. The impairment charges reduced the carrying value of the lease asset to its estimated fair value. Fair value was estimated using an income-approach based on management's forecast of future cash flows expected to be derived from the property based on current sublease market rent.

Suspension of Canadian expansion. In 2019, the Company announced plans to expand internationally with an initial launch into Canada. The Company continues to believe international markets provide a long-term growth opportunity for the Company. However, given the current operating environment, in September 2020 the Company decided to prioritize growth of its U.S. operations at this time and suspended its planned expansion to Canada. Investments to support the expansion into Canada have largely been limited to early-stage infrastructure buildout and lease obligations for a small number of stores. In conjunction with this decision, the Company expects to incur pre-tax costs in the range of $30,000 to $40,000, the majority of which will be recognized in fiscal 2020. During the 13 and 39 weeks ended October 31, 2020, the Company recognized restructuring charges related to suspension of the Canada expansion of $15,886. The remaining estimated charges primarily relate to lease termination costs. There were 0 related restructuring charges for the 13 and 39 weeks ended November 2, 2019.

Other severance. As part of the efforts to optimize its cost structure, the Company eliminated the salon manager and prestige manager roles and created a new, single service manager. During the 13 and 39 weeks ended October 31, 2020, the Company recognized severance charges of $5,708. There were 0 related severance charges for the 13 and 39 weeks ended November 2, 2019.

6.Goodwill and other intangible assets

Goodwill, which represents the excess of cost over the fair value of net assets acquired, amounted to $10,870 at October 31, 2020, February 1, 2020, and November 2, ~~2019 and February 2, 2019 and $9,084 at November 3, 2018.~~2019. NaN additional goodwill was recognized during the 13 and 39 weeks ended ~~November 2,~~ ~~2019.~~October 31, 2020. The Company reviews the recoverability of goodwill annually during the fourth quarter or more frequently if an event occurs or circumstances change that would indicate that impairment may exist.

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Other intangible assets with finite useful lives are amortized over their useful lives. The Company reviews the recoverability of long-lived assets whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable.

As a result of the COVID-19 pandemic and decline in the macroeconomic environment, the Company performed an interim impairment analysis as of October 31, 2020, which indicated that no impairment existed for goodwill or other intangible assets.

6.7.Leases

~~The Company determines whether an arrangement is or contains a lease at contract inception.~~ The Company leases retail stores, distribution and fast fulfillment centers, ~~and~~ corporate offices, and certain equipment under non-cancellable operating leases with various expiration dates through ~~2032.~~2033. Leases generally have an initial lease term of 10 years and include renewal options under substantially the same terms and conditions as the original leases. Leases do not contain any material residual value guarantees or material restrictive covenants.

The lease classification evaluation begins at the lease commencement date. The lease term used in the evaluation includes the non-cancellable period for which the Company has the right to use the underlying asset, together with renewal option periods when the exercise of the renewal option is reasonably certain and failure to exercise such option would result in an economic penalty. All retail store, distribution and fast fulfillment center, and corporate office leases are classified as operating leases. The Company does not have any finance leases.

Total rent payable is recorded during the lease term, including rent escalations in which the amount of future rent is fixed on the straight-line basis over the term of the lease (including the rent holiday period beginning upon control of the premises and any fixed payments stated in the lease). For leases with an initial term greater than 12 months, a related lease liability is recorded on the balance sheet at the present value of future payments discounted at the estimated fully collateralized incremental borrowing rate (discount rate) corresponding with the lease term. In addition, a right-of-use asset is recorded as the initial amount of the lease liability, plus any lease payments made to the lessor before or at the lease commencement date and any initial direct costs incurred, less any tenant improvement allowance incentives received. Tenant incentives are amortized through the right-of-use asset as reduction of rent expense over the lease term. The difference between the minimum rents paid and the straight-line rent (deferred rent) is reflected within the associated right-of-use asset. Operating lease expense is recognized on a straight-line basis over the lease term.

Certain leases contain provisions that require additional rent payments based upon sales volume (“variable lease cost”). Contingent rent is accrued each period as the liabilities are incurred, in addition to the straight-line rent expense. This results in some variability in lease expense as a percentage of revenues over the term of the lease in stores where contingent rent is paid.

~~Leases with an initial term of 12 months or less (“short-term leases”) are not recorded on the balance sheet. Short-term lease expense is recognized on a straight-line basis over the lease term.~~

~~The Company subleases certain real estate to third parties for stores with excess square footage space.~~

~~The Company does not separate lease and non-lease components (e.g., common area maintenance).~~

As the interest rate implicit in the lease is not readily determinable, the Company uses its incremental borrowing rate corresponding with the lease term. As there are no outstanding borrowings under the Company’s credit facility, this rate is estimated based on prevailing market conditions, comparable company and credit analysis, and judgment. The incremental borrowing rate is reassessed if there is a change to the lease term or if a modification occurs and it is not accounted for as a separate contract.

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~~The following table presents supplemental balance sheet information, the weighted-average remaining lease term, and discount rate for operating leases as of November 2, 2019:~~

(In thousands)

Classification on the Balance Sheet

November 2, 2019
Right-of-use assets

Operating lease assets

$
1,529,524

Current lease liabilities

Current operating lease liabilities

$
222,627
Non-current lease liabilities

Non-current operating lease liabilities

1,706,806
Total lease liabilities

$
1,929,433

Weighted-average remaining lease term

6.8 years
Weighted-average discount rate

4.1%

Lease cost

~~The following table presents the components of lease cost for operating leases:~~

13 Weeks Ended

39 Weeks Ended
(In thousands)

Classification on the Statement of Income

November 2, 2019

November 2, 2019
Operating lease cost

Cost of sales (1)

$
72,467

$
215,388
Variable lease cost

Cost of sales

(1,834)

(5,158)
Short-term lease cost

Selling, general and administrative expenses

109

247
Sublease income

Net sales

(135)

(425)
Total lease cost

$
70,607

$
210,052

~~(1)~~ The majority of operating lease cost relates to retail stores and distribution and fast fulfillment centers and is classified within cost of sales. Operating lease cost for corporate offices is classified within selling, general and administrative expenses. Operating lease cost from the control date through store opening date is classified within pre-opening expenses. Operating lease cost was $75,649 and $72,467 for the 13 weeks ended October 31, 2020 and November 2, 2019, respectively. Operating lease cost was $228,881 and $215,388 for the 39 weeks ended October 31, 2020 and November 2, 2019, respectively.

Other information

The following table presents supplemental disclosures of cash flow information related to operating leases:


	39 Weeks Ended		39 Weeks Ended
(In thousands)	November 2, 2019		October 31, 2020		November 2, 2019
Cash paid for operating lease liabilities (1)	$	251,468	$	263,893	$	251,468
Operating lease assets obtained in exchange for operating lease liabilities (non-cash)	$	287,645		188,240		287,645

(1)	Excludes ~~$57,160~~ ~~related to~~ cash received for tenant ~~incentives.~~incentives of $22,789 and $57,160 for the 39 weeks ended October 31, 2020 and November 2, 2019, respectively.

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~~Maturity of lease liabilities~~

~~The following table presents maturities of operating lease liabilities as of November 2, 2019:~~

Fiscal year

(In thousands)
2019 (1)

$
35,555
2020

348,826
2021

337,449
2022

319,252
2023

283,484
2024 and thereafter

919,024
Total lease payments

$
2,243,590
Less: Imputed interest

(314,157)
Present value of operating lease liabilities

$
1,929,433

~~(1)~~

~~Excluding the 39 weeks ended November 2, 2019 and net of tenant incentives.~~

~~Operating lease payments exclude $186,632 of legally binding minimum lease payments for leases signed but not yet commenced.~~

7.8.Commitments and contingencies

The Company is involved in various legal proceedings that are incidental to the conduct of the business including both class action and single plaintiff litigation. In the opinion of management, the amount of any liability with respect to these proceedings, either individually or in the aggregate, will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

8.9.~~Notes payable~~Debt

On ~~August 23, 2017,~~March 11, 2020, the Company entered into aAmendment No. 1 to the Second Amended and Restated Loan Agreement ~~(the~~(as so amended, the Loan Agreement) with Wells Fargo Bank, National Association, as Administrative Agent, Collateral Agent and a Lender thereunder; Wells Fargo Bank, National Association and JPMorgan Chase Bank, N.A., as Lead Arrangers and Bookrunners; JPMorgan Chase Bank, N.A., as Syndication Agent and a Lender; PNC Bank, National Association, as Documentation Agent and a Lender; and the other lenders party thereto. The Loan Agreement matures on ~~August 23, 2022,~~March 11, 2025, provides maximum revolving loans equal to the lesser of ~~$400,000~~$1,000,000 or a percentage of eligible owned inventory and eligible owned receivables (which borrowing base may, at the election of the Company and satisfaction of certain conditions, include a percentage of ~~eligible owned receivables and~~ qualified cash), contains a ~~$20,000~~$50,000 subfacility for letters of credit and allows the Company to increase the revolving facility by an additional ~~$50,000,~~$100,000, subject to the consent by each lender and other conditions. The Loan Agreement contains a requirement to maintain a fixed charge coverage ratio of not less than 1.0 to 1.0 during such periods when availability under the Loan Agreement falls below a specified threshold. Substantially all of the Company’s assets are pledged as collateral for outstanding borrowings under the Loan Agreement. Outstanding borrowings bear interest, at the Company’s election, at either a base rate plus a margin of 0% to 0.125% or the London Interbank Offered Rate plus ~~1.25%~~a margin of 1.125% to 1.250%, with such margins based on the Company’s borrowing availability, and the unused line fee is 0.20% per annum.

As of October 31, 2020, February 1, 2020, and November 2, 2019, ~~February 2, 2019, and November 3, 2018,~~ the Company had 0no borrowings outstanding under the credit facility and the weighted average interest rate was 1.56% for the 39 weeks ended October 31, 2020. As of October 31, 2020, the Company was in compliance with all terms and covenants of the Loan Agreement.

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9.10.Fair value measurements

The carrying value of cash and cash equivalents, short-term investments, accounts receivable, and accounts payable approximates their estimated fair values due to the short maturities of these instruments.

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Fair value is measured using inputs from the three levels of the fair value hierarchy, which are described as follows:

●

Level 1 – observable inputs such as quoted prices for identical instruments in active markets.

●

Level 2 – inputs other than quoted prices in active markets that are observable either directly or indirectly through corroboration with observable market data.

●

Level 3 – unobservable inputs in which there is little or no market data, which would require the Company to develop its own assumptions.

As of October 31, 2020, February 1, 2020, and November 2, 2019, ~~February 2, 2019 and November 3, 2018,~~ the Company held financial liabilities included in other long-term liabilities on the consolidated balance sheets of ~~$27,417, $19,615,~~$29,240, $29,442, and ~~$22,128,~~$27,417, respectively, related to its non-qualified deferred compensation plan. The liabilities have been categorized as Level 2 as they are based on third-party reported values, which are based primarily on quoted market prices of underlying assets of the funds within the plan.

Some assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances. These assets can include long-lived assets and goodwill that are reduced to fair value when impaired. Assets that are written down to fair value when impaired are not subsequently adjusted to fair value unless further impairment occurs.

~~10.~~11. Investments

Short-term investments typically consist of certificates of deposit and are carried at cost, which approximates fair value and are recorded in the consolidated balance sheets in short-term investments. ~~As of November 2, 2019, February 2, 2019, and November 3, 2018, the~~The Company did not have ~~any~~ short-term ~~investments.~~investments as of October 31, 2020 and November 2, 2019. The Company’s short-term investments were $110,000 as of February 1, 2020.

The Company’s investments in renewable energy projects are accounted for under the equity method of accounting. The balance of these investments was $3,642, $3,936, and $11,000 as of October 31, 2020, February 1, 2020, and November 2, 2019, respectively, and is included in other long-term assets on the consolidated balance ~~sheet.~~sheets. The Company contributed capital of $5,665 and received distributions including $1,690 of investment tax credits during the 39 weeks ended October 31, 2020. The Company contributed capital of $43,757 and received distributions including $31,554 of investment tax credits during the 39 weeks ended November 2, 2019.

~~11.~~12.Stock-based compensation

The Company measures stock-based compensation expense on the grant date, based on the fair value of the award, and recognizes the expense on a straight-line basis over the requisite service period for awards expected to vest. The Company estimated the grant date fair value of stock options using a Black-Scholes valuation model using the following weighted-average assumptions for the periods indicated:


	39 Weeks Ended		39 Weeks Ended
	November 2,	November 3,	October 31,	November 2,
	2019	2018	2020	2019
Volatility rate	31.0%	29.0%	43.0%	31.0%
Average risk-free interest rate	2.3%	2.4%	0.3%	2.3%
Average expected life (in years)	3.5	3.4	3.4	3.5
Dividend yield	NaN	NaN	NaN	NaN

The Company granted 97248 and ~~163~~97 stock options during the 39 weeks ended October 31, 2020 and November 2, 2019, ~~and November 3, 2018,~~ respectively. The stock-based compensation expense ~~charged against operating income~~ for stock options was ~~$2,204~~$2,900 and ~~$2,134~~$2,204 for the 13 weeks ended October 31, 2020 and November 2, 2019, ~~and November 3, 2018,~~ respectively. The stock-based compensation expense ~~charged against operating income~~ for stock options was ~~$6,523~~$8,247 and ~~$6,557~~$6,523 for the 39 weeks ended October 31, 2020 and November 2, 2019, ~~and November 3, 2018,~~ respectively. The weighted-average grant date fair value of these stock options was ~~$89.91~~$54.40 and ~~$50.10~~$89.91 for the 39 weeks ended October 31, 2020 and

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November 2, 2019, ~~and November 3, 2018,~~ respectively. At ~~November 2, 2019,~~October 31, 2020, there was approximately ~~$18,105~~$20,691 of unrecognized stock-based compensation expense related to unvested stock options.

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The Company issued 52161 and 9552 restricted stock units during the 39 weeks ended October 31, 2020 and November 2, 2019, ~~and November 3, 2018,~~ respectively. The stock-based compensation expense ~~charged against operating income~~ for restricted stock units was ~~$3,429~~$5,098 and ~~$3,449~~$3,429 for the 13 weeks ended October 31, 2020 and November 2, 2019, ~~and November 3, 2018,~~ respectively. The stock-based compensation expense ~~charged against operating income~~ for restricted stock units was ~~$9,672~~$14,446 and ~~$9,244~~$9,672 for the 39 weeks ended October 31, 2020 and November 2, 2019, ~~and November 3, 2018,~~ respectively. At ~~November 2, 2019,~~October 31, 2020, there was approximately ~~$24,383~~$34,048 of unrecognized stock-based compensation expense related to restricted stock units.

The Company did not issue any performance-based restricted stock units during the 39 weeks ended October 31, 2020. The Company issued 21 ~~and 33~~ performance-based restricted stock units during the 39 weeks ended November 2, ~~2019 and November 3, 2018, respectively.~~2019. The stock-based compensation expense for performance-based restricted stock units was $386 for the 13 weeks ended October 31, 2020. The stock-based compensation benefit ~~included in operating income~~ for performance-based restricted stock units was $122 for the 13 weeks ended November 2, 2019. The stock-based compensation expense ~~charged against operating income~~ for performance-based restricted stock units was ~~$1,904 for the 13 weeks ended November 3, 2018. The stock-based compensation expense charged against operating income for performance-based restricted stock units was~~$286 and $2,979 ~~and $5,083~~ for the 39 weeks ended October 31, 2020 and November 2, 2019, ~~and November 3, 2018,~~ respectively. At ~~November 2, 2019,~~October 31, 2020, there was approximately ~~$7,793~~$613 of unrecognized stock-based compensation expense related to performance-based restricted stock units.

~~12.~~13.Income taxes

Income tax expense reflects the federal statutory tax rate and the weighted average state statutory tax rate for the states in which the Company operates stores. Income tax expense of ~~$38,933~~$25,096 for the 13 weeks ended ~~November 2, 2019~~October 31, 2020 represents an effective tax rate of ~~23.1%~~25.1%, compared to ~~$39,365~~$38,933 of tax expense representing an effective tax rate of ~~23.1%~~23.1% for the 13 weeks ended November 3, ~~2018.~~2, 2019. The higher effective tax rate is primarily due to less investment tax credits received.

Income tax expense of ~~$134,729~~$2,935 for the 39 weeks ended ~~November 2, 2019~~October 31, 2020 represents an effective tax rate of ~~21.8%~~40.3%, compared to ~~$132,771~~$134,729 of tax expense representing an effective tax rate of ~~23.0%~~21.8% for the 39 weeks ended November ~~3, 2018.~~2, 2019. The ~~lower~~higher effective tax rate is primarily due to a near break-even pre-tax operating income in fiscal 2020, less investment tax credits received, and tax expense from the income tax accounting for share-based compensation ~~and federal income~~compared to a tax ~~credits.~~benefit in fiscal 2019.

~~13.~~14.Net income per common share

The following is a reconciliation of net incomeand the number of shares of common stock used in the computation of net income per basic and diluted share:


	13 Weeks Ended				39 Weeks Ended				13 Weeks Ended				39 Weeks Ended
	November 2,		November 3,		November 2,		November 3,		October 31,		November 2,		October 31,		November 2,
(In thousands, except per share data)	2019		2018		2019		2018		2020		2019		2020		2019
Numerator for diluted net income per share – net income	$	129,747	$	131,166	$	483,226	$	443,885
Numerator:
Net income									$	74,798	$	129,747	$	4,341	$	483,226

Denominator for basic net income per share – weighted-average common shares		57,568		59,724		58,123		60,135
Denominator:
Weighted-average common shares – Basic										56,327		57,568		56,355		58,123
Dilutive effect of stock options and non-vested stock		195		338		273		297		219		195		169		273
Denominator for diluted net income per share		57,763		60,062		58,396		60,432
Weighted-average common shares – Diluted										56,546		57,763		56,524		58,396

Net income per common share:
Basic	$	2.25	$	2.20	$	8.31	$	7.38	$	1.33	$	2.25	$	0.08	$	8.31
Diluted	$	2.25	$	2.18	$	8.27	$	7.35	$	1.32	$	2.25	$	0.08	$	8.27

The denominator for diluted net income per common share for the 13 weeks ended October 31, 2020 and November 2, 2019 excludes 246 and ~~November 3, 2018 excludes~~ 219 ~~and 106~~ employee stock options and restricted stock units, respectively, due to their anti-dilutive

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effects. The denominator for diluted net income per common share for the 39 weeks ended October 31, 2020 and November 2, 2019 excludes 562 and ~~November 3, 2018 excludes~~ 217 ~~and 298~~ employee stock options and restricted stock units, respectively, due to their anti-dilutive effects. Outstanding performance-based restricted stock units are included in the computation of dilutive shares only to the extent that the underlying performance conditions are satisfied prior to the end

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of the reporting period or would be considered satisfied if the end of the reporting period were the end of the related contingency period and the results would be dilutive under the treasury stock method.

~~14.~~15.Share repurchase program

On March 9, 2017, the Company announced that the Board of Directors authorized a share repurchase program (the 2017 Share Repurchase Program) pursuant to which the Company could repurchase up to $425,000 of the Company’s common stock. The 2017 Share Repurchase Program authorization revoked the previously authorized but unused amount of $79,863 from the earlier share repurchase program. The 2017 Share Repurchase Program did not have an expiration date but provided for suspension or discontinuation at any time.

On March 15, 2018, the Company announced that the Board of Directors authorized a share repurchase program (the 2018 Share Repurchase Program) pursuant to which the Company could repurchase up to $625,000 of the Company’s common stock. The 2018 Share Repurchase Program authorization revoked the previously authorized but unused amount of $41,317 from the ~~2017 Share Repurchase Program.~~earlier share repurchase program. The 2018 Share Repurchase Program did not have an expiration date but provided for suspension or discontinuation at any time.

On March 14, 2019, the Company announced that the Board of Directors authorized a new share repurchase program (the 2019 Share Repurchase Program) pursuant to which the Company ~~may~~could repurchase up to $875,000 of the Company’s common stock. The 2019 Share Repurchase Program authorization revoked the previously authorized but unused amount of $25,435 from the 2018 Share Repurchase Program. The 2019 Share Repurchase Program did not have an expiration date but provided for suspension or discontinuation at any time.

On March 12, 2020, the Company announced that the Board of Directors authorized a new share repurchase program (the 2020 Share Repurchase Program) pursuant to which the Company may repurchase up to $1,600,000 of the Company’s common stock. The 2020 Share Repurchase Program authorization revoked the previously authorized but unused amounts of $165,309 from the 2019 Share Repurchase Program. The 2020 Share Repurchase Program does not have an expiration date and may be suspended or discontinued at any time.

~~During the 39 weeks ended November~~ On April 2, ~~2019,~~2020, the Company ~~purchased 1,639 shares~~announced that the share repurchase program had been suspended in order to strengthen its liquidity and preserve cash in the early stages of the COVID-19 pandemic. The Company may resume the 2020 Share Repurchase Program in the fourth quarter of fiscal 2020.

A summary of the Company’s common stock ~~for $506,868. During~~repurchase activity is presented in the ~~39 weeks ended November 3, 2018, the Company purchased 1,582 shares of common stock for $379,423.~~following table:


	39 Weeks Ended
(In thousands)	October 31, 2020		November 2, 2019
Shares repurchased		327		1,639
Total cost of shares repurchased	$	72,981	$	506,868

Item 2.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 financial statements and related notes included elsewhere in this quarterly report. This discussion contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, which reflect our current views with respect to, among other things, future events and financial performance. You can identify these forward-looking statements by the use of forward-looking words such as “outlook,” “believes,” “expects,” “plans,” “estimates,” “targets,” “strategies,” or other comparable words. Any forward-looking statements contained in this Form 10-Q are based upon our historical performance and on current plans, estimates, and expectations. The inclusion of this forward-looking information should not be regarded as a representation by us or any other person that the future plans, estimates, targets, strategies, or expectations

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contemplated by us will be achieved. Such forward-looking statements are subject to various risks and uncertainties, which include, without limitation:

●

the negative impacts the coronavirus (COVID-19) has had, and will continue to have, on our business, financial condition, profitability, cash flows, and supply chain, as well as consumer spending (including future uncertain impacts);

●

epidemics, pandemics like COVID-19 or natural disasters that have and could continue to negatively impact sales;

●

changes in the overall level of consumer spending and volatility in the ~~economy;~~economy, including as a result of the COVID-19 pandemic;

●

~~the possibility~~a decline in operating results that wehas and may ~~be unable~~continue to ~~compete effectively in our highly competitive markets;~~

●

~~the possibility that the capacity of our distribution~~lead to asset impairment and ~~order fulfillment infrastructure and the performance of our newly opened and to be opened distribution centers may not be adequate to support our recent growth and expected future growth plans;~~store closures charges;

●

our ability to sustain our growth plans and successfully implement our long-range strategic and financial plan;

●

our ability to gauge beauty trends and react to changing consumer preferences in a timely manner;

●

the possibility that we may be unable to compete effectively in our highly competitive markets;

●

our ability to execute our Efficiencies for Growth cost optimization program;

●

the possibility that cybersecurity breaches and other disruptions could compromise our information or result in the unauthorized disclosure of confidential information;

●

the possibility of material disruptions to our information systems;

●

the possibility that the capacity of our ~~ability~~distribution and order fulfillment infrastructure and the performance of our newly opened and to ~~gauge beauty trends~~be opened distribution centers may not be adequate to support our recent growth and ~~react to changing consumer preferences in a timely manner;~~expected future growth plans;

●

changes in the wholesale cost of our products;

●

the possibility that new store openings and existing locations may be impacted by developer or co-tenant issues;

●

our ability to attract and retain key executive personnel;

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●

~~natural disasters that could negatively impact sales;~~

●

our ability to successfully execute our common stock repurchase program or implement future common stock repurchase programs; and

●

other risk factors detailed in our public filings with the Securities and Exchange Commission (the SEC), including risk factors contained in Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the year ended February ~~2, 2019,~~1, 2020, as such were amended and supplemented in Part II, Item 1A, “Risk Factors” of our Quarterly Report on Form 10-Q for the fiscal quarter ended May 2, 2020, and which may be further amended or supplemented in our subsequently filed Quarterly Reports on Form 10-Q (including this report).

Except to the extent required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

References in the following discussion to “we,” “us,” “our,” “Ulta Beauty,” the “Company,” and similar references mean Ulta Beauty, Inc. and its consolidated subsidiaries, unless otherwise expressly stated or the context otherwise requires.

Overview

We were founded in 1990 as a beauty retailer at a time when prestige, mass, and salon products were sold through distinct channels – department stores for prestige ~~products,~~products; drug stores and mass merchandisers for mass ~~products,~~products; and salons and authorized retail outlets for professional hair care products. We developed a unique specialty retail concept that offers a broad range of brands and price points, a compelling value proposition, and a convenient and welcoming shopping environment. We define our target consumer as a beauty enthusiast, a consumer who is passionate about the beauty category and has high expectations for the shopping experience. We believe our strategy provides us with the competitive advantages that have contributed to our financial performance.

We are the largest beauty retailer in the United States and the premier beauty destination for cosmetics, fragrance, skin care products, hair care products, and salon services. We provide unmatched product breadth, value, and convenience in a distinctive specialty retail environment. Key aspects of our business include: our ability to offer our guests a unique combination of more than 25,000 beauty products from across the categories of prestige and mass cosmetics, fragrance, haircare, skincare, bath and body products, and salon styling tools, as well as a full-service salon in every store featuring hair, skin, and brow services; our focus on delivering a compelling value proposition to our guests across all of our

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product categories; and convenience, as our stores are predominantly located in convenient, high-traffic locations such as power centers.

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 strategic imperatives: 1) drive growth across beauty enthusiast consumer groups, 2) deepen Ulta Beauty love and loyalty, 3) deliver a one of a kind, world class beauty assortment, 4) lead the in-store and beauty services experience transformation, 5) reinvent beauty digital engagement, 6) deliver operational excellence and drive efficiencies, and 7) invest in talent that drives a winning culture. WeOver the long term, we believe that the ~~expanding~~expansion of the U.S. beauty products and salon services industry, the shift in distribution channel of prestige beauty products from department stores to specialty retail stores, coupled with Ulta Beauty’s competitive strengths, ~~position~~positions us to capture additional market share in the industry.

Comparable sales is a key metric that is monitored closely within the retail industry. Our comparable sales have fluctuated in the past, and we expect them to continue to fluctuate in the future. A variety of factors affect our comparable sales, including general U.S. economic conditions, changes in merchandise strategy or mix, and timing and effectiveness of our marketing activities, among others.

Over the long term, our growth strategy is to increase total net sales through increases in our comparable sales, opening new stores, and increasing omnichannel capabilities. ~~Operating~~Long term operating profit is expected to increase as a result of our ability to expand merchandise margin and leverage our fixed store costs with comparable sales increases and operating efficiencies offset by incremental investments in people, systems, and supply chain required to support a 1,500 to 1,700 store chain in the U.S. with successful e-commerce and competitive omnichannel capabilities.

COVID-19 Response

We have been and continue to closely monitor the impact of the COVID-19 outbreak on all facets of our business. We have taken decisive actions to protect the safety of our associates and guests and to manage the business through the fluid and challenging environment resulting from the COVID-19 pandemic.

In late 2019, COVID-19 was detected in Wuhan, China and other jurisdictions, prompting the Chinese government to quarantine certain affected regions and impose both internal and external travel restrictions within the country. The virus has since spread to almost every other part of the world, including the U.S., and in March 2020, the World Health Organization declared COVID-19 a global pandemic. Federal, state, and local governments implemented various restrictions, including travel restrictions, border closings, restrictions on public gatherings, quarantining of people who may have been exposed to the virus, shelter-in-place restrictions and limitations on business operations.

In response to government recommendations and for the health and safety of our associates and guests, on March 19, 2020 we temporarily closed all stores across the U.S., while continuing to support our essential e-commerce operations. Effective April 19, 2020, we temporarily furloughed many of our store and salon associates and introduced curbside pickup. Throughout the second quarter, stores were reopened on a phased timeline, by taking a thoughtful, measured approach based on a variety of criteria, including state and local guidelines and the adoption of our new Shop Safe Standards related safety protocols. As of July 20, 2020, we completed our phased reopening process. By October 31, 2020, salon and brow services had resumed in almost all stores. Reflecting operational limitations related to COVID-19 and the partial resumption of services, the Company has reactivated more than half of the furloughed associates.

Our results of operations for the 13 and 39 weeks ended October 31, 2020, were significantly impacted by the effects of COVID-19. Comparable sales decreased 8.9% and 23.8% for the 13 and 39 weeks ended October 31, 2020, respectively, as a result of the COVID-19 pandemic, but the multi-year, strategic investments we have made to enhance our omnichannel and supply chain capabilities, combined with the ongoing commitment of our distribution associates, have enabled us to support increased e-commerce demand and guest engagement. In addition to decreases in net revenue, our overall profitability also decreased as compared to the prior year. These developments have further required us to recognize certain long-lived asset impairment charges and restructuring charges. Further, in connection with the Coronavirus Aid, Relief, and Economic Security (CARES) Act, we recognized payroll subsidies as a reduction of selling, general and administrative expenses in the consolidated statement of operations.

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As we navigate these unprecedented circumstances, we continue to focus on our financial flexibility, including drawing down $800.0 million under our $1.0 billion revolving credit facility on March 18, 2020, which was repaid in full on September 2, 2020. In addition, since the onset of the COVID-19 pandemic, we have taken the following steps to preserve financial liquidity:

●

limited new hires and delayed merit increases for all corporate, store, and salon associates;

●

reduced marketing, travel and controllable expenses;

●

aligned inventory receipts with current sales trends;

●

prioritized payment obligations;

●

reduced new store openings, relocations and remodel projects; and

●

suspended our stock repurchase program, which may be resumed in the fourth quarter of fiscal 2020.

To help support our associates through this crisis, we expanded the criteria for our Associate Relief Program to include those who need assistance due to a personal hardship as a result of COVID-19. The Ulta Beauty executive team and Board of Directors have each made personal donations to the program.

While sales are expected to be challenged as events continue to change, we are unable to accurately predict the impact that COVID-19 will have on our results of operations due to uncertainties including, but not limited to, the potential temporary reclosing of certain of our stores, the potential temporary restrictions on certain store operating hours and/or in-store capacity, the duration of potential future quarantines, shelter-in-place and other travel restrictions within the U.S. and other affected countries, the severity of the virus, the duration and spread of the virus, the duration, timing and severity of the impact on consumer spending, how quickly and to what extent normal economic and operating conditions can resume, and the public’s response to resurgences of the virus and its eventual aftermath.

~~Current business~~Industry trends

Our research indicates that Ulta Beauty ~~continues to drive~~has captured meaningful market share across all ~~categories.~~categories over the last several years. However, our research also suggests that the cosmetics category in the overall U.S. market ~~has~~ experienced mid-single digit declines through ~~the first nine months of 2019.~~fiscal 2019 and into 2020. Beauty cycles are impacted by demographics and innovation. While demographic trends continue to be favorable, we believe a lack of incremental innovation has resulted in a challenging cycle for the cosmetics category, as innovation brought to the market has not resulted in incremental product purchases. ~~Despite~~In addition, COVID-19 and its various impacts have changed consumer behavior and consumption of beauty products due to the ~~overall market~~closures of offices, retail stores and other businesses and the significant decline in ~~the cosmetics category, we~~social gatherings. We remain confident that our differentiated and diverse business model, our commitment to strategic investments, and our highly engaged associates will continue to drive market share ~~gains.~~gains over the long term.

Basis of presentation

The Company has one reportable segment, which includes retail stores, salon services, and e-commerce.

We recognize merchandise revenue at the point of sale in our retail stores. E-commerce merchandise sales are recognized based upon shipment of merchandise to the guest based on meeting the transfer of control criteria. Retail store and e-commerce sales are recorded net of estimated returns. Shipping and handling are treated as costs to fulfill the contract and asnot a ~~result, any fees received from guests are included in~~separate performance obligation. Accordingly, we recognize revenue for our single performance obligation related to online sales at the ~~transaction price allocated~~time control of the merchandise passes to the ~~performance obligation~~customer, which is at the time of ~~providing goods with a corresponding amount accrued within cost of sales for amounts paid to applicable carriers.~~shipment. We provide refunds for merchandise returns within 60 days from the original purchase ~~date.~~date; however, due to store closures during the first half of fiscal 2020, we extended our return policy to 180 days. State sales taxes are presented on a net basis as we consider our self a pass-through conduit for collecting and remitting state sales tax. Salon service revenue is recognized at the time the service is provided to the guest. Gift card sales revenue is deferred until the guest redeems the gift card. Company coupons and other incentives are recorded as a reduction of net sales. Other revenue sources include the private label credit card and co-branded credit card programs, as well as deferred revenue related to the loyalty program and gift card breakage.

Comparable sales reflect sales for stores beginning on the first day of the 14^th 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~~ one-

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month grand opening period. Non-comparable store sales include sales from new stores that have not yet completed their 13^th month of operation and stores that were closed for part or all of the period in either ~~year as a result of remodel activity.~~year. Remodeled stores are included in comparable sales unless the store was closed for a portion of the current or prior period. Comparable sales include retail sales and salon services (including stores temporarily closed due to COVID-19), and e-commerce. There may be variations in the way in which some of our competitors and other retailers calculate comparable or same store sales.

Measuring comparable sales 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 sales results:

●

the general national, regional, and local economic conditions and corresponding impact on customer spending levels;

●

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 merchandising and 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 substantially all vendor allowances, which are treated as a reduction of merchandise costs;

●

distribution costs including labor and related benefits, freight, rent, depreciation and amortization, real estate taxes, utilities, and insurance;

●

shipping and handling costs;

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●

retail stores occupancy costs including rent, depreciation and amortization, real estate taxes, utilities, repairs and maintenance, insurance, licenses, and cleaning expenses;

●

salon services payroll and benefits; and

●

shrink and inventory valuation reserves.

Our cost of sales may be negatively impacted as we open ~~an increasing number of~~new stores. 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 stores and corporate employees;

●

advertising and marketing costs;

●

occupancy costs related to our corporate office facilities;

●

stock-based compensation expense;

●

depreciation and amortization for all assets, except those related to our retail stores and distribution operations, which are 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.

Impairment, restructuring and other costs include long-lived asset impairment charges, restructuring costs associated with store closings, costs associated with the suspension of our Canadian expansion, and employee related severance costs.

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Pre-opening expenses include non-capital expenditures during the period prior to store opening for new, remodeled, and relocated stores including rent from the control date through store opening date for new and relocated stores, store set-up labor, management and employee training, and grand opening advertising.

Interest ~~income,~~expense (income), net includes both interest income and expense. ~~Interest income represents interest from cash equivalents and short-term investments with maturities of twelve months or less from the date of purchase.~~ Interest expense includes interest costs and facility fees associated with our credit facility, which is structured as an asset-based lending instrument. Our credit facility interest is based on a variable interest rate structure which can result in increased cost in periods of rising interest rates. Interest income represents interest from cash equivalents and short-term investments with maturities of twelve months or less from the date of purchase.

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.

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Results of operations

Our quarterly periods are the 13 weeks ending on the Saturday closest to April 30, July 31, October 31, and January 31. The Company’s third quarter in fiscal ~~2019~~2020 and ~~2018~~2019 ended on October 31, 2020 and November 2, 2019, ~~and November 3, 2018,~~ respectively. Our operating results for the 13 and 39 weeks ended October 31, 2020 may not be indicative of the results that may be expected for the fiscal year ending January 30, 2021 because of the COVID-19 pandemic. In addition, 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.

The following table presents the components of our consolidated results of operations for the periods indicated:


	13 Weeks Ended				39 Weeks Ended				13 Weeks Ended				39 Weeks Ended
	November 2,		November 3,		November 2,		November 3,		October 31,		November 2,		October 31,		November 2,
(Dollars in thousands)	2019		2018		2019		2018		2020		2019		2020		2019
Net sales	$	1,682,514	$	1,560,011	$	5,092,150	$	4,591,899	$	1,552,033	$	1,682,514	$	3,953,252	$	5,092,150
Cost of sales		1,059,081		987,733		3,217,971		2,923,447		1,006,514		1,059,081		2,775,121		3,217,971
Gross profit		623,433		572,278		1,874,179		1,668,452		545,519		623,433		1,178,131		1,874,179

Selling, general and administrative expenses		449,198		395,453		1,245,174		1,078,219		416,378		449,198		1,068,877		1,245,174
Impairment, restructuring and other costs										23,624		—		83,924		—
Pre-opening expenses		6,455		7,612		15,667		17,363		4,240		6,455		12,782		15,667
Operating income		167,780		169,213		613,338		572,870		101,277		167,780		12,548		613,338
Interest income, net		(900)		(1,318)		(4,617)		(3,786)
Interest expense (income), net										1,383		(900)		5,272		(4,617)
Income before income taxes		168,680		170,531		617,955		576,656		99,894		168,680		7,276		617,955
Income tax expense		38,933		39,365		134,729		132,771		25,096		38,933		2,935		134,729
Net income	$	129,747	$	131,166	$	483,226	$	443,885	$	74,798	$	129,747	$	4,341	$	483,226

Other operating data:
Number of stores end of period		1,241		1,163		1,241		1,163		1,262		1,241		1,262		1,241
Comparable sales increase		3.2%		7.8%		5.4%		7.5%
Comparable sales increase (decrease)										(8.9%)		3.2%		(23.8%)		5.4%


	13 Weeks Ended				39 Weeks Ended				13 Weeks Ended				39 Weeks Ended
	November 2,		November 3,		November 2,		November 3,		October 31,		November 2,		October 31,		November 2,
(Percentage of net sales)	2019		2018		2019		2018		2020		2019		2020		2019
Net sales		100.0%		100.0%		100.0%		100.0%		100.0%		100.0%		100.0%		100.0%
Cost of sales		62.9%		63.3%		63.2%		63.7%		64.9%		62.9%		70.2%		63.2%
Gross profit		37.1%		36.7%		36.8%		36.3%		35.1%		37.1%		29.8%		36.8%

Selling, general and administrative expenses		26.7%		25.3%		24.5%		23.5%		26.8%		26.7%		27.1%		24.5%
Impairment, restructuring and other costs										1.5%		0.0%		2.1%		0.0%
Pre-opening expenses		0.4%		0.5%		0.3%		0.4%		0.3%		0.4%		0.3%		0.3%
Operating income		10.0%		10.8%		12.0%		12.5%		6.5%		10.0%		0.3%		12.0%
Interest income, net		0.1%		0.1%		0.1%		0.1%
Interest expense (income), net										0.1%		(0.1%)		0.1%		(0.1%)
Income before income taxes		10.1%		10.9%		12.1%		12.6%		6.4%		10.1%		0.2%		12.1%
Income tax expense		2.3%		2.5%		2.6%		2.9%		1.6%		2.3%		0.1%		2.6%
Net income		7.7%		8.4%		9.5%		9.7%		4.8%		7.7%		0.1%		9.5%

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Comparison of 13 weeks ended ~~November 2, 2019~~October 31, 2020 to 13 weeks ended November ~~3, 2018~~2, 2019

Net sales

Net sales ~~increased $122.5~~decreased $130.5 million or ~~7.9%~~7.8%, to ~~$1,682.5 million~~$1.6 billion for the 13 weeks ended October 31, 2020, compared to $1.7 billion for the 13 weeks ended November 2, ~~2019,~~2019. The net sales decrease was driven by the negative impacts of the COVID-19 pandemic, including social distancing, reduction of operating hours, limitations on in-store capacity and in some cases, mandated store closures and a decrease of $2.5 million in other revenue. Total comparable sales for the 13 weeks ended October 31, 2020, decreased 8.9% compared to ~~$1,560.0~~an increase of 3.2% for the 13 weeks ended November 2, 2019. During the 13 weeks ended October 31, 2020, transactions declined 15.4% and average ticket increased 7.6%.

Gross profit

Gross profit decreased $77.9 million or 12.5%, to $545.5 million for the 13 weeks ended November 3, 2018. Comparable stores contributed $48.3 million of the total net sales increase and non-comparable stores contributed $70.3 million of the total net sales increase. Other revenue increased $3.9 millionOctober 31, 2020, compared ~~to the third quarter of 2018.~~

The total comparable sales increase of 3.2% included a 2.3% increase in transactions and a 0.9% increase in average ticket. We attribute the increase in comparable sales to our successful marketing and merchandising strategies.

~~Gross profit~~

~~Gross profit increased $51.2 million or 8.9%,~~ to $623.4 million for the 13 weeks ended November 2, ~~2019, compared to $572.3 million for the 13 weeks ended November 3, 2018.~~2019. Gross profit as a percentage of net sales ~~increased40 basis points~~decreased to 35.1% for the 13 weeks ended October 31, 2020, compared to 37.1% for the 13 weeks ended November 2, ~~2019, compared to 36.7% for the 13 weeks ended November 3, 2018.~~2019. The ~~increase~~decrease in gross profit margin was primarily due to ~~improvement in merchandise margins driven by marketing~~deleverage of fixed costs due to lower sales and ~~merchandising strategies and leverage in fixed store costs,~~channel mix shifts. These pressures were partially offset by ~~investments in salon services.~~higher merchandise margins primarily due to lower promotional activity.

Selling, general and administrative expenses

Selling, general and administrative (SG&A) expenses ~~increased $53.7~~decreased $32.8 million or ~~13.6%~~7.3%, to $416.4 million for the 13 weeks ended October 31, 2020, compared to $449.2 million for the 13 weeks ended November 2, ~~2019, compared to $395.5 million for the 13 weeks ended November 3, 2018.~~2019. Lower store payroll and benefits, store expenses, and marketing expenses were partially offset by higher corporate overhead expense and personal protective equipment (PPE) and COVID-related expenses. SG&A expenses as a percentage of net sales increased ~~140 basis points~~to 26.8% for the 13 weeks ended October 31, 2020, compared to 26.7% for the 13 weeks ended November 2, 2019, ~~compared~~due to ~~25.3%~~lower sales resulting from the impact of COVID-19.

Impairment, restructuring and other costs

Impairment, restructuring and other costs were $23.6 million for the 13 weeks ended October 31, 2020, which consisted of $15.9 million related to the suspension of our planned expansion to Canada. We expect to incur pre-tax costs in the range of $30,000 to $40,000 as a result of the suspension, the majority of which will be recognized in fiscal 2020. The remaining estimated charges primarily relate to lease termination costs. During the 13 weeks ended October 31, 2020, impairment, restructuring and other costs also included $5.7 million of severance charges and $2.0 million of lease terminations costs related to the previously announced permanent closure of 19 stores. There was no impairment, restructuring and other costs for the 13 weeks ended November 3, 2018. The increase is primarily due to deleverage in corporate overhead related to investments in growth initiatives and store labor, partially offset by lower incentive compensation expense and leverage in marketing expense.2, 2019.

Pre-opening expenses

Pre-opening expenses decreased ~~$1.2~~$2.2 million to $4.2 million for the 13 weeks ended October 31, 2020, compared to $6.5 million for the 13 weeks ended November 2, ~~2019, compared to $7.6 million for the 13 weeks ended November 3, 2018.~~2019. During the 13 weeks ended ~~November 2, 2019,~~October 31, 2020, we opened 3117 new ~~stores, remodeled three~~ stores and relocated two stores, compared to the 13 weeks ended November ~~3, 2018,~~2, 2019, when we opened 4231 new stores, remodeled ~~four~~three stores, and relocated ~~one store.~~two stores.

Interest ~~income,~~expense (income), net

Interest ~~income,~~expense, net was $1.4 million for the 13 weeks ended October 31, 2020 compared to $0.9 million of interest income for the 13 weeks ended November 2, ~~2019 compared~~2019. Interest expense represents interest on borrowings and fees related to ~~$1.3 million for~~ the ~~13 weeks ended November 3, 2018.~~credit facility. Interest income results from cash equivalents and short-term investments with maturities of twelve months or less from the date of purchase. ~~Interest expense represents interest on borrowings and fees related to the credit facility.~~ We did not have any outstanding borrowings on our credit facility as of October 31, 2020 and November 2, ~~2019 and November 3, 2018.~~2019.

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Income tax expense

Income tax expense of ~~$38.9~~$25.1 million for the 13 weeks ended ~~November 2, 2019~~October 31, 2020 represents an effective tax rate of ~~23.1%~~25.1%, compared to ~~$39.4~~$38.9 million of tax expense representing an effective tax rate of 23.1% for the 13 weeks ended November ~~3, 2018.~~2, 2019. The higher effective tax rate is primarily due to less investment tax credits received.

Net income

Net income was $74.8 million for the 13 weeks ended October 31, 2020, compared to $129.7 million for the 13 weeks ended November 2, 2019. The decrease in net income is primarily due to the $77.9 million decrease in gross profit partially offset by a decrease in SG&A expenses of $32.8 million and $13.8 million decrease in income taxes. These decreases were partially offset by a $23.6 million increase in impairment, restructuring and other costs.

Comparison of 39 weeks ended October 31, 2020 to 39 weeks ended November 2, 2019

Net sales

Net sales decreased $1.1 billion or 22.4%, to $4.0 billion for the 39 weeks ended October 31, 2020, compared to $5.1 billion for the 39 weeks ended November 2, 2019. The net sales decrease was driven by the negative impacts of the COVID-19 pandemic, including the temporary closing of our brick-and-mortar retail stores, shelter in place orders, social distancing and quarantines, and a decrease of $4.5 million in other revenue. Total comparable sales for the 39 weeks ended October 31, 2020, decreased 23.8% compared to an increase of 5.4% for the 39 weeks ended November 2, 2019. During the 39 weeks ended October 31, 2020, transactions declined 30.1% and average ticket increased 9.0%.

Gross profit

Gross profit decreased $696.0 million or 37.1%, to $1.2 billion for the 39 weeks ended October 31, 2020, compared to $1.9 billion for the 39 weeks ended November 2, 2019. Gross profit as a percentage of net sales decreased to 29.8% for the 39 weeks ended October 31, 2020, compared to 36.8% for the 39 weeks ended November 2, 2019. The decrease in gross profit margin was primarily due to deleverage of fixed costs due to lower sales, channel mix shifts, and deleverage of salon expenses due to lower sales. These pressures were partially offset by lower promotional activity.

Selling, general and administrative expenses

SG&A expenses decreased $176.3 million or 14.2%, to $1.1 billion for the 39 weeks ended October 31, 2020, compared to $1.2 billion for the 39 weeks ended November 2, 2019. SG&A expenses as a percentage of net sales increased to 27.1% for the 39 weeks ended October 31, 2020, compared to 24.5% for the 39 weeks ended November 2, 2019. The increase was primarily due to higher expenses related to strategic growth investments made in 2019, PPE and COVID-related expenses, and the deleverage of store expenses due to lower sales resulting from the impact of COVID-19, partially offset by leverage related to the store payroll and benefits, including the employee retention credits made available under the CARES Act.

Impairment, restructuring and other costs

Impairment, restructuring and other costs were $83.9 million for the 39 weeks ended October 31, 2020, which consisted of $40.4 million due to the impairment of tangible long-lived assets and operating lease assets associated with certain retail stores, $21.9 million related to the permanent closure of 19 stores, and $5.7 million of severance charges. During the 39 weeks ended October 31, 2020, impairment, restructuring and other costs also included $15.9 million related to the suspension of our planned expansion to Canada. We expect to incur pre-tax costs in the range of $30,000 to $40,000 as a result of the suspension, the majority of which will be recognized in fiscal 2020. The remaining estimated charges primarily relate to lease termination costs. There was no impairment, restructuring and other costs for the 39 weeks ended November 2, 2019.

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~~Net income~~Pre-opening expenses

~~Net income was $129.7~~Pre-opening expenses decreased $2.9 million ~~for the 13 weeks ended November 2, 2019, compared~~ to $131.2 million for the 13 weeks ended November 3, 2018. The decrease in net income is primarily related to the $53.7 million increase in SG&A expenses partially offset by a $51.2 million increase in gross profit.

~~Comparison of 39 weeks ended November 2, 2019 to 39 weeks ended November 3, 2018~~

~~Net sales~~

~~Net sales increased $500.3 million or 10.9%, to $5,092.2~~$12.8 million for the 39 weeks ended ~~November 2, 2019,~~October 31, 2020, compared to $4,591.9 million for the 39 weeks ended November 3, 2018. Comparable stores contributed $244.9 million of the total net sales increase and non-comparable stores contributed $243.0 million of the total net sales increase. Other revenue increased $12.4 million compared to the 39 weeks ended November 3, 2018.

The total comparable sales increase of 5.4% included a 4.0% increase in transactions and a 1.4% increase in average ticket. We attribute the increase in comparable sales to our successful marketing and merchandising strategies.

~~Gross profit~~

Gross profit increased $205.7 million or 12.3%, to $1,874.2 million for the 39 weeks ended November 2, 2019, compared to $1,668.5 million for the 39 weeks ended November 3, 2018. Gross profit as a percentage of net sales increased50 basis points to 36.8% for the 39 weeks ended November 2, 2019, compared to 36.3% for the 39 weeks ended November 3, 2018. The increase in gross profit margin was primarily due to improvement in merchandise margins driven by marketing and merchandising strategies and leverage in fixed store costs, partially offset by investments in salon services and supply chain operations.

~~Selling, general and administrative expenses~~

SG&A expenses increased $167.0 million or 15.5%, to $1,245.2 million for the 39 weeks ended November 2, 2019, compared to $1,078.2 million for the 39 weeks ended November 3, 2018. SG&A expenses as a percentage of net sales increased 100 basis points to 24.5% for the 39 weeks ended November 2, 2019, compared to 23.5% for the 39 weeks ended November 3, 2018. The increase is primarily due to deleverage in corporate overhead related to investments in growth initiatives and store labor, partially offset by leverage in marketing expense.

~~Pre-opening expenses~~

~~Pre-opening expenses decreased $1.7 million~~ to $15.7 million for the 39 weeks ended November 2, ~~2019, compared to $17.4 million for the 39 weeks ended November 3, 2018.~~2019. During the 39 weeks ended ~~November 2, 2019,~~October 31, 2020, we opened 7328 new stores and ~~remodeled 12 stores, and~~ relocated ~~six~~three stores, compared to the 39 weeks ended November ~~3, 2018,~~2, 2019, when we opened 9573 new stores, remodeled 1312 stores, and relocated ~~two~~six stores.

Interest ~~income,~~expense (income), net

Interest ~~income,~~expense, net was $5.3 million for the 39 weeks ended October 31, 2020 compared to $4.6 million of interest income, net for the 39 weeks ended November 2, ~~2019 compared~~2019. Interest expense represents interest on borrowings and fees related to ~~$3.8 million for~~ the ~~39 weeks ended November 3, 2018.~~credit facility. Interest income results from cash equivalents and short-term investments with maturities of twelve months or less from the date of purchase. ~~Interest expense represents interest on borrowings and fees related to the credit facility.~~ We did not have any outstanding borrowings on our credit facility as of October 31, 2020 and November 2, ~~2019 and November 3, 2018.~~2019.

Income tax expense

Income tax expense of ~~$134.7~~$2.9 million for the 39 weeks ended ~~November 2, 2019~~October 31, 2020 represents an effective tax rate of ~~21.8%~~40.3%, compared to ~~$132.8~~$134.7 million of tax expense representing an effective tax rate of ~~23.0%~~21.8% for the 39 weeks ended November ~~3, 2018.~~2, 2019. The ~~lower~~higher effective tax rate is primarily due to a near break-even pre-tax operating income in fiscal 2020, less investment tax credits received, and tax expense from the income tax accounting for share-based compensation ~~and federal income~~compared to a tax ~~credits.~~benefit in fiscal 2019.

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Net income

Net income ~~increased $39.3~~was $4.3 million ~~or 8.9%,~~for the 39 weeks ended October 31, 2020, compared to $483.2 million for the 39 weeks ended November 2, ~~2019, compared to $443.9 million for the 39 weeks ended November 3, 2018.~~2019. The ~~increase~~decrease in net income is primarily ~~related~~due to the ~~$205.7~~$696.0 million ~~increase~~decrease in gross profit partially offset by a ~~$167.0~~$176.3 million decrease in SG&A expenses and $131.8 million decrease to income taxes. These decreases were partially offset by an $83.9 million increase in ~~SG&A expenses.~~impairment, restructuring and other costs.

Liquidity and capital resources

Our primary cash needs are for rent, capital expenditures for new, remodeled, relocated, and refreshed stores (prestige boutiques and related in-store merchandising upgrades), increased merchandise inventories related to store expansion and new brand additions, in-store boutiques (sets of custom-designed fixtures configured to prominently display certain prestige brands within our stores), supply chain improvements, share repurchases, and continued improvement in our information technology systems.

Our primary sources of liquidity are cash and cash equivalents, short-term investments, cash flows from operations, including changes in working capital, and borrowings under our credit facility. As of October 31, 2020, February 1, 2020, and November 2, 2019, we had cash and cash equivalents and short-term investments of $560.9 million, $502.3 million, and $208.8 million, respectively. As part of our response to the continued spread of COVID-19 and to improve our financial flexibility, we drew down $800.0 million under our $1.0 billion revolving credit facility on March 18, 2020. On September 2, 2020, we repaid the $800 million of borrowing that was outstanding under the facility.

The most significant components of our working capital are merchandise inventories and cash and cash equivalents reduced by related accounts payable and accrued expenses.

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 may not have collected all of the landlord allowances due to us as part of our lease agreements. Based on past performance and current expectations, we believe that cash and cash equivalents, short-term investments, cash generated from operations, and borrowings under the credit facility will satisfy the Company’s working capital needs, capital expenditure needs, commitments, and other liquidity requirements through at least the next twelve months.

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The following table presents a summary of our cash flows for the periods indicated:


	39 Weeks Ended				39 Weeks Ended
	November 2,		November 3,		October 31,		November 2,
(In thousands)	2019		2018		2020		2019
Net cash provided by operating activities	$	557,506	$	542,214	$	259,045	$	557,506
Net cash used in investing activities		(284,893)		(150,021)		(13,630)		(284,893)
Net cash used in financing activities		(473,021)		(372,694)		(76,752)		(473,021)
Effect of exchange rate changes on cash and cash equivalents						(86)		—
Net increase (decrease) in cash and cash equivalents	$	(200,408)	$	19,499	$	168,577	$	(200,408)

Operating activities

Operating activities consist of net income adjusted for certain non-cash items, including depreciation and amortization, non-cash lease expense, long-lived asset impairment charge, deferred income taxes, stock-based compensation expense, realized gains or losses on disposal of property and equipment, and the effect of working capital changes. The ~~increase~~decrease over the prior ~~year~~period is mainly due to ~~increase~~the decrease in net income, ~~other assets and liabilities,~~merchandise inventories, and the timing of ~~prepaid expenses~~accounts payable. The decrease in net income was primarily due to a decrease in gross profit resulting from lower sales as a result of the COVID-19 pandemic and an increase in impairment, restructuring and other ~~current assets,~~costs, partially offset by ~~the timing of accounts payable~~a decrease in SG&A expenses and ~~the increase in merchandise inventories.~~income taxes.

Merchandise inventories, net were ~~$1,616.9 million~~$1.4 billion at October 31, 2020, compared to $1.6 billion at November 2, 2019, ~~compared~~representing a decrease of $177.8 million or 11.0%. The decrease in total inventory was primarily driven by the decline in sales due to ~~$1,484.6 million at November 3, 2018, representing~~COVID-19 and lower holiday receipts, partially offset by an increase ~~of $132.4 million or 8.9%. Average inventory per store increased 2.1% compared to prior year. The increase in inventory is primarily~~ due to ~~the addition of 78~~21 net new stores opened since November ~~3, 2018~~2, 2019 and ~~timing~~the opening of ~~shipments ahead of the holiday season.~~our Jacksonville, FL fast fulfillment center. Average inventory per store was down 12.5% compared to prior year.

Investing activities

We have historically used cash primarily for new, remodeled, relocated, and refreshed stores, supply chain investments, short-term investments, and investments in information technology systems. Investment activities for capital expenditures were $116.7 million during the 39 weeks ended October 31, 2020, compared to $241.1 million during the 39 weeks ended November 2, ~~2019, compared to $256.4 million during the~~

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~~39 weeks ended November 3, 2018. As of November 2, 2019, we did not have any short-term investments.~~2019. During the 39 weeks ended ~~November 2,~~ ~~2019,~~October 31, 2020, we contributed ~~$43.8~~$5.7 million to equity method investments.

Our future investments will depend primarily on the number of new, remodeled, and relocated stores, information technology systems, and supply chain investments we undertake and the timing of these expenditures. In light of the pandemic, we reduced our capital expenditure plan for fiscal 2020, and anticipate capital expenditures will be between $150 million and $160 million.

Financing activities

Financing activities ~~in fiscal 2019 and 2018~~ consist principally of borrowings on our revolving credit facility, share repurchases, and capital stock transactions. Purchases of treasury shares represent the fair value of common shares repurchased from plan participants in connection with shares withheld to satisfy minimum statutory tax obligations upon the vesting of restricted stock.

We As of October 31, 2020, February 1, 2020, and November 2, 2019, we had no borrowings outstanding under our credit facility as of November 2, 2019, February 2, 2019 and November 3, 2018. The zero outstanding borrowings position is due to a combination of factors including strong sales growth, overall performance of management initiatives including expense control, as well as inventory and other working capital reductions. We may require borrowings under the facility from time to time in future periods to support our new store program, share repurchases, and seasonal inventory needs.facility.

Share repurchase plan

On March 9, 2017, we announced that the Board of Directors authorized a share repurchase program (the 2017 Share Repurchase Program) pursuant to which the Company could repurchase up to $425.0 million of the Company’s common stock. The 2017 Share Repurchase Program authorization revoked the previously authorized but unused amount of $79.9 million from the earlier share repurchase program. The 2017 Share Repurchase Program did not have an expiration date but provided for suspension or discontinuation at any time.

On March 15, 2018, we announced that the Board of Directors authorized a share repurchase program (the 2018 Share Repurchase Program) pursuant to which the Company could repurchase up to $625.0 million of the Company’s common stock. The 2018 Share Repurchase Program authorization revoked the previously authorized but unused amount of $41.3 million from the ~~2017 Share Repurchase Program.~~earlier share repurchase program. The 2018 Share Repurchase Program did not have an expiration date but provided for suspension or discontinuation at any time.

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On March 14, 2019, we announced that the Board of Directors authorized a new share repurchase program (the 2019 Share Repurchase Program) pursuant to which the Company ~~may~~could repurchase up to $875.0 million of the Company’s common stock. The 2019 Share Repurchase Program authorization revoked the previously authorized but unused amount of $25.4 million from the 2018 Share Repurchase Program. The 2019 Share Repurchase Program did not have an expiration date but provided for suspension or discontinuation at any time.

On March 12, 2020, we announced that the Board of Directors authorized a new share repurchase program (the 2020 Share Repurchase Program) pursuant to which the Company may repurchase up to $1.6 billion of the Company’s common stock. The 2020 Share Repurchase Program authorization revoked the previously authorized but unused amounts of $165.3 million from the 2019 Share Repurchase Program. The 2020 Share Repurchase Program does not have an expiration date and may be suspended or discontinued at any time. On April 2, 2020, we announced that the share repurchase program had been suspended in order to strengthen our liquidity and preserve cash in the early stages of the COVID-19 pandemic. While no shares were repurchased in the third quarter, the Company may resume its stock repurchase program in the fourth quarter of fiscal 2020.

~~During~~A summary of the ~~39 weeks ended November 2, 2019, we purchased 1,639,438 shares of~~Company’s common stock ~~for $506.9 million. During~~repurchase activity is presented in the ~~39 weeks ended November 3, 2018, we purchased 1,582,118 shares of common stock for $379.4 million.~~following table:


	39 Weeks Ended
(Dollars in millions)	October 31, 2020		November 2, 2019
Shares repurchased		326,970		1,639,438
Total cost of shares repurchased	$	73.0	$	506.9

Credit facility

On ~~August 23, 2017,~~March 11, 2020, we entered into aAmendment No. 1 to the Second Amended and Restated Loan Agreement ~~(the~~(as so amended, the Loan Agreement) with Wells Fargo Bank, National Association, as Administrative Agent, Collateral Agent and a Lender thereunder; Wells Fargo Bank, National Association and JPMorgan Chase Bank, N.A., as Lead Arrangers and Bookrunners; JPMorgan Chase Bank, N.A., as Syndication Agent and a Lender; PNC Bank, National Association, as Documentation Agent and a Lender; and the other lenders party thereto. The Loan Agreement matures on ~~August 23, 2022,~~March 11, 2025, provides maximum revolving loans equal to the lesser of ~~$400.0 million~~$1.0 billion or a percentage of eligible owned inventory and eligible owned receivables (which borrowing base may, at the election of the Company and satisfaction of certain conditions, include a percentage of ~~eligible owned receivables and~~ qualified cash), contains a ~~$20.0~~$50.0 million subfacility for letters of credit and allows the Company to increase the revolving facility by an additional ~~$50.0~~$100.0 million, subject to the consent by each lender and other conditions. The Loan Agreement contains a requirement to maintain a fixed charge coverage ratio of not less than 1.0 to 1.0 during such periods when availability under the Loan Agreement falls below a specified threshold. Substantially all of the Company’s assets are pledged as collateral for outstanding borrowings under the Loan Agreement. Outstanding borrowings bear interest, at the Company’s election, at either a base rate plus a margin of 0% to 0.125% or the London Interbank Offered Rate plus ~~1.25%~~a margin of 1.125% to 1.250%, with such margins based on the Company’s borrowing availability, and the unused line fee is 0.20% per annum.

~~Table of Contents~~

As of October 31, 2020, February 1, 2020, and November 2, 2019, ~~February 2, 2019 and November 3, 2018,~~ we had no borrowings outstanding under the credit ~~facility~~facility. As of October 31, 2020, the weighted average interest rate was 1.56% and ~~the Company was~~we were in compliance with all terms and covenants of the Loan Agreement.

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 Mother’s Day and Valentine’s 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.

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Off-balance sheet arrangements

As of ~~November 2, 2019,~~October 31, 2020, we have not entered into any “off-balance sheet” arrangements, as that term is described by the SEC. We do, however, have off-balance sheet purchase obligations incurred in the ordinary course of business.

Contractual obligations

Our contractual obligations consist of operating lease obligations, purchase obligations, and our revolving line of credit. ~~No material changes outside the ordinary course of business have occurred in our contractual obligations during~~During the 39 weeks ended ~~November 2, 2019.~~October 31, 2020, we drew down and repaid $800 million of borrowing under the facility.

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 principles. The preparation of these consolidated financial statements required the use of estimates and judgments that affect the reported amounts of our assets, liabilities, 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. ~~Other than adoption of the new lease accounting standard as discussed in Note 6 to our consolidated financial statements, “Leases,” there~~There have been no significant changes to the critical accounting policies and estimates included in our Annual Report on Form 10-K for the fiscal year ended February ~~2, 2019.~~1, 2020.

Recent accounting pronouncements not yet adopted

See Note 2 to our consolidated financial statements, “Summary of significant accounting policies – Recent accounting pronouncements not yet adopted.”

Recently adopted accounting pronouncements

See Note 2 to our consolidated financial statements, “Summary of significant accounting policies – Recently adopted accounting pronouncements.”

Item 3.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 and foreign currency exchange rates. We do not hold or issue financial instruments for trading purposes.

Interest rate risk

We are exposed to interest rate risks primarily through borrowings under our credit facility. Interest on our borrowings is based upon variable rates. We did not have any outstanding borrowings on our credit facility as of October 31, 2020 and November 2, ~~2019~~2019.

A hypothetical 1% increase in interest rates on variable rate debt would have increased interest expense for the 39 weeks ended October 31, 2020 by approximately $3.7 million.

Foreign currency exchange rate risk

We are exposed to risks from foreign currency exchange rate fluctuations on the translation of our foreign operations into U.S. dollars and ~~November 3, 2018.~~on the purchase of goods by these foreign operations that are not denominated in their local currencies. Our exposure to foreign currency rate fluctuations is not material to our financial condition or results of operations.

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Item 4.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 ~~November 2, 2019,~~October 31, 2020, 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, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in internal control over financial reporting

There were no changes to our internal controls over financial reporting during the 13 weeks ended ~~November 2, 2019~~October 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

Part II - Other Information

Item 1.Legal Proceedings

See Note 78 to our consolidated financial statements, “Commitments and contingencies,” for information on legal proceedings.

Item 1A.Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended February 1, 2020, as such were amended and supplemented in Part II, Item 1A, “Risk Factors” in our Quarterly Report on Form 10-Q for the fiscal quarter ended May 2, ~~2019,~~2020, which could materially affect our business, financial condition, financial results, or future performance. There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended February 1, 2020 other than as such were previously supplemented and amended in our Quarterly Report on Form 10-Q for the fiscal quarter ended May 2, ~~2019.~~2020.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

The following table sets forth repurchases of our common stock during the third quarter of ~~2019:~~2020:

Period

Total number
of shares
purchased (1)

Average
price paid
per share

Total number
of shares
purchased as
part of publicly
announced
plans or
programs (2)

Approximate
dollar value of
shares that may yet
be purchased
under plans or programs
(in thousands) (2)
August 4, 2019 to August 31, 2019

36,309

$
329.78

36,309

$
505,355
September 1, 2019 to September 28, 2019

302,181

231.79

301,991

435,357
September 29, 2019 to November 2, 2019

191,289

243.83

191,104

388,762
13 weeks ended November 2, 2019

529,779

242.85

529,404

388,762


Period	Total number of shares purchased (1)	Average price paid per share		Total number of shares purchased as part of publicly announced plans or programs (2)	Approximate dollar value of shares that may yet be purchased under plans or programs (in thousands) (2)
August 2, 2020 to August 29, 2020	615	$	203.88	–	$	1,576,360
August 30, 2020 to September 26, 2020	464		228.90	–		1,576,360
September 27, 2020 to October 31, 2020	239		233.55	–		1,576,360
13 weeks ended October 31, 2020	1,318		218.07	–		1,576,360

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(1)

There were ~~529,404~~no shares repurchased as part of our publicly announced share repurchase program during the 13 weeks ended ~~November 2, 2019~~October 31, 2020 and there were ~~375~~1,318 shares transferred from employees in satisfaction of minimum statutory tax withholding obligations upon the vesting of restricted stock during the period.

~~Table of Contents~~

(2)

On March ~~14, 2019,~~12, 2020, we announced the ~~2019~~2020 Share Repurchase Program pursuant to which the Company may repurchase up to ~~$875.0 million~~$1.6 billion of the Company’s common stock. The ~~2019~~2020 Share Repurchase Program authorization revoked the previously authorized but unused amount of ~~$25.4~~$165.3 million from the ~~2018~~2019 Share Repurchase Program. As of ~~November 2, 2019, $388.8 million~~October 31, 2020, $1.58 billion remained available under the ~~$875.0 million 2019~~$1.6 billion 2020 Share Repurchase Program.

Item 3.Defaults Upon Senior Securities

None

Item 4.Mine Safety Disclosures

None

Item 5.Other Information

None

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Item 6.Exhibits

The exhibits listed in the Exhibit Index below are filed as part of this Quarterly Report on Form 10-Q.

EXHIBIT INDEX


			Incorporated by Reference						Incorporated by Reference
Exhibit Number	Description of document	Filed Herewith	Form	Exhibit Number	File Number	Filing Date	Description of document	Filed Herewith	Form	Exhibit Number	File Number	Filing Date

3.1	Certificate of Incorporation of Ulta Beauty, Inc.		8-K	3.1	001-33764	1/30/2017	Certificate of Incorporation of Ulta Beauty, Inc.		8-K	3.1	001-33764	1/30/2017
3.2	Certificate of Designations of Series A Junior Participating Preferred Stock of Ulta Beauty, Inc.		8-K	3.2	001-33764	1/30/2017	Bylaws of Ulta Beauty, Inc., as amended through June 3, 2020		8-K	3.2	001-33764	6/8/2020
3.3	Bylaws of Ulta Beauty, Inc., as amended through June 5, 2019		8-K	3	001-33764	6/10/2019
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	X					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	X
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	X					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	X
32	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	X					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	X
101.INS	Inline XBRL Instance	X					Inline XBRL Instance	X
101.SCH	Inline XBRL Taxonomy Extension Schema	X					Inline XBRL Taxonomy Extension Schema	X
101.CAL	Inline XBRL Taxonomy Extension Calculation	X					Inline XBRL Taxonomy Extension Calculation	X
101.LAB	Inline XBRL Taxonomy Extension Labels	X					Inline XBRL Taxonomy Extension Labels	X
101.PRE	Inline XBRL Taxonomy Extension Presentation	X					Inline XBRL Taxonomy Extension Presentation	X
101.DEF	Inline XBRL Taxonomy Extension Definition	X					Inline XBRL Taxonomy Extension Definition	X
104	Cover page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101).						Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101).

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on December ~~5, 2019~~3, 2020 on its behalf by the undersigned, thereunto duly authorized.


	ULTA BEAUTY, INC.

	By:	/s/ Mary N. Dillon
		Mary N. Dillon Chief Executive Officer and Director

	By:	/s/ Scott M. Settersten
		Scott M. Settersten Chief Financial Officer, Treasurer and Assistant Secretary

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	November 2,		February 2,		November 3,
(In thousands, except per share data)	2019		2019		2018
Assets		(Unaudited)				(Unaudited)
Current assets:
Cash and cash equivalents	$	208,843	$	409,251	$	296,944
Receivables, net		112,888		136,168		102,353
Merchandise inventories, net		1,616,920		1,214,329		1,484,565
Prepaid expenses and other current assets		118,343		138,116		119,817
Prepaid income taxes		40,474		16,997		22,294
Total current assets		2,097,468		1,914,861		2,025,973

Property and equipment, net		1,233,412		1,226,029		1,257,775
Operating lease assets		1,529,524		—		—
Goodwill		10,870		10,870		9,084
Other intangible assets, net		3,622		4,317		6,985
Deferred compensation plan assets		26,269		20,511		21,397
Other long-term assets		27,683		14,584		11,477
Total assets	$	4,928,848	$	3,191,172	$	3,332,691

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	594,993	$	404,016	$	574,480
Accrued liabilities		249,112		220,666		255,156
Deferred revenue		190,188		199,054		154,447
Current operating lease liabilities		222,627		—		—
Total current liabilities		1,256,920		823,736		984,083

Non-current operating lease liabilities		1,706,806		—		—
Deferred rent		—		434,980		432,052
Deferred income taxes		83,856		83,864		50,045
Other long-term liabilities		34,110		28,374		30,775
Total liabilities		3,081,692		1,370,954		1,496,955

Commitments and contingencies (Note 7)

Stockholders' equity:
Common stock, $0.01 par value, 400,000 shares authorized; 57,959, 59,232, and 60,108 shares issued; 57,283, 58,584, and 59,461 shares outstanding; at November 2, 2019 (unaudited), February 2, 2019, and November 3, 2018 (unaudited), respectively		580		592		601
Treasury stock-common, at cost		(34,272)		(24,908)		(24,706)
Additional paid-in capital		800,986		738,671		731,890
Retained earnings		1,079,862		1,105,863		1,127,951
Total stockholders’ equity		1,847,156		1,820,218		1,835,736
Total liabilities and stockholders’ equity	$	4,928,848	$	3,191,172	$	3,332,691


	As Reported		Effect of Adopting		Balance at
(In thousands)	February 2, 2019		ASC 842		February 3, 2019
Assets					(Unaudited)
Receivables, net	$	136,168	$	(17,468)	$	118,700
Prepaid expenses and other current assets		138,116		(25,260)		112,856
Property and equipment, net		1,226,029		(16,983)		1,209,046
Operating lease assets		—		1,460,866		1,460,866
Liabilities and stockholders’ equity
Accrued liabilities		220,666		(1,460)		219,206
Current operating lease liabilities		—		210,721		210,721
Deferred rent		434,980		(434,980)		—
Non-current operating lease liabilities		—		1,629,249		1,629,249
Retained earnings		1,105,863		(2,375)		1,103,488



(In thousands)	Classification on the Balance Sheet	November 2, 2019
Right-of-use assets	Operating lease assets	$	1,529,524

Current lease liabilities	Current operating lease liabilities	$	222,627
Non-current lease liabilities	Non-current operating lease liabilities		1,706,806
Total lease liabilities		$	1,929,433

Weighted-average remaining lease term			6.8 years
Weighted-average discount rate			4.1%


Fiscal year	(In thousands)
2019 (1)	$	35,555
2020		348,826
2021		337,449
2022		319,252
2023		283,484
2024 and thereafter		919,024
Total lease payments	$	2,243,590
Less: Imputed interest		(314,157)
Present value of operating lease liabilities	$	1,929,433