Week 6 Disc Questions

Access Ulta’s company quarterly financial statements (10-Q) for the past two quarters on EDGAR, which is available on the web page https://www.sec.gov/edgar/searchedgar/companysearch• Prepare a balance sheet and income statement horizontal analysis for the last two quarters. • Prepare a balance sheet and income statement vertical analysis for the last two quarters. • Prepare a liquidity analysis by computing and using the appropriate ratios to assess liquidity. ◦ Compute a minimum of three ratios and show your supporting calculations. • Prepare a solvency analysis by computing and using the appropriate ratios to assess solvency. ◦ Compute a minimum of three ratios and show your supporting calculations.

This paper performs vertical and horizontal analyses of ULTA BEAUTY, INC. balance sheet and income statement for Q1 and Q2, 2022 (EDGAR, 2022).

Balance Sheet

Horizontal Analysis

(All values are in thousands $)

Item	April 30, 2022	July 30, 2022	$ change	% change
Assets
Current assets:
Cash and cash equivalents	654,486	434,226	(220,260)	(33.65%)
Receivables, net	192,754	180,514	(12,240)	(6.35%)
Merchandise inventories, net	1,570,552	1,666,130	95,578	6.06%
Prepaid expenses and other current assets	114,075	123,014	8,939	7.84%
Total current assets	2,531,867	2,442,913	(88,954)	(3.51%)
Property and equipment, net	909,543	912,017	2,474	.27%
Operating lease assets	1,488,040	1,509,246	21,206	1.42%
Total assets	5,012,036	4,945,994	(66,042)	1.32%
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	585,500	586,851	1,351	0.23%
Accrued liabilities	305,000	323,939	18,939	6.2%
Deferred revenue	324,694	316,571	(8,123)	(2.5%)
Current operating lease liabilities	276,440	274,693	(1,747)	(0.63%)
Total current liabilities	1,599,747	1,502,054	(97,693)	(6.11%)
Non-current operating lease liabilities	1,568,356	1,582,003	13,647	0.87%
Deferred income taxes	40,702	40,029	(673)	(1.65%)
Other long-term liabilities	57,611	52,840	(4,771)	(8.28%)
Total liabilities	3,266,416	3,176,926	(89,490)	(2.74%)
Total stockholders’ equity	1,745,620	1,769,068	23,448	1.34%
Total liabilities and stockholders’ equity	5,012,036	4,945,994	(66,042)	(1.32%)

Horizontal Analysis

(All values are in thousands $)

Item	April 30, 2022	% change	July 30, 2022	% change
Assets
Current assets:
Cash and cash equivalents	654,486	13%	434,226	8.78%
Receivables, net	192,754	3.85%	180,514	3.65%
Merchandise inventories, net	1,570,552	31.34%	1,666,130	33.69%
Prepaid expenses and other current assets	114,075	2.28%	123,014	2.49%
Total current assets	2,531,867	50.52%	2,442,913	49.39%
Property and equipment, net	909,543	18.15%	912,017	18.44%
Operating lease assets	1,488,040	29.69%	1,509,246	30.5%
Total assets	5,012,036	100%	4,945,994	100%
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	585,500	11.68%	586,851	11.87%
Accrued liabilities	305,000	6.09%	323,939	6.55%
Deferred revenue	324,694	6.48%	316,571	6.4%
Current operating lease liabilities	276,440	5.5%	274,693	5.55%
Total current liabilities	1,599,747	31.92%	1,502,054	30.37%
Non-current operating lease liabilities	1,568,356	31.29%	1,582,003	31.99%
Deferred income taxes	40,702	0.81%	40,029	0.81%
Other long-term liabilities	57,611	1.15%	52,840	1.07%
Total liabilities	3,266,416	65.17%	3,176,926	64.23%
Total stockholders’ equity	1,745,620	34.83%	1,769,068	35.77%
Total liabilities and stockholders’ equity	5,012,036	100%	4,945,994	100%

Income Statement

Vertical Analysis

(All values are in thousands $)

Item	April 30, 2022	July 30, 2022	$ change	% change
Net sales	2,345,901	2,297,113	(48,788)	(2.08%)
Cost of sales	1,404,875	1,368,949	(35,926)	(2.56%)
Gross profit	941,026	928,164	(12,862)	(1.37%)
Selling, general and administrative expenses	500,970	534,459	33,489	6.68%
Pre-opening expenses	2,348	2,277	(71)	(3.02%)
Operating income	437,708	391,428	(42,280)	(9.66%)
Interest expense, net	401	(108)	509	126.9%
Income before income taxes	437,307	391,536	(45,771)	(10.47%)
Income tax expense	105,912	95,859	(10,053)	(9.49%)
Net income	331,395	295,677	(35,718)	(10.78%)
Net income per common share:
Basic	6.34	5.73	(0.61)	(9.62%)
Diluted	6.30	5.70	(0.6)	(9.52%)
Weighted average common shares outstanding:
Basic	52,250	51,607	(643)	(1.23%)
Diluted	52,582	51,900	(682)	(1.3%)

Horizontal Analysis

(All values are in thousands $)

Item	April 30, 2022	% change	July 30, 2022	% change
Net sales	2,345,901	100%	2,297,113	100%
Cost of sales	1,404,875	59.89%	1,368,949	59.59%
Gross profit	941,026	40.11%	928,164	40.41%
Selling, general and administrative expenses	500,970	21.36%	534,459	23.27%
Pre-opening expenses	2,348	0.1%	2,277	0.1%
Operating income	437,708	18.66%	391,428	17.04%
Interest expense, net	401	0.02%	(108)	0.005%
Income before income taxes	437,307	18.64%	391,536	17%
Income tax expense	105,912	4.51%	95,859	4.17%
Net income	331,395	14.13%	295,677	12.87%
Net income per common share:
Basic	6.34	–	5.73	–
Diluted	6.30	–	5.70	–
Weighted average common shares outstanding:
Basic	52,250	2.23%	51,607	2.25%
Diluted	52,582	2.24%	51,900	2.56%

Liquidity Analysis

1. Current Ratio

Current Ratio = (Current Assets/Current Liabilities)

Q1 2022: Current ratio = 2,531,867 / 1,599,747 = 1.58

Q2 2022: Current ratio = 2,442,913 / 1,502,054 = 1.63

In both Quarter 1 and 2 of 2022, the company’s current ratio was below 2, which indicates that the firm does not have sufficient assets to cover the short-term obligations. It is growing its sales faster than it can finance them which pose a high risk of insolvency. However, there has been some notable improvement because the current ratio for quarter 2 increased by 0.5 compared to quarter 1, 2022.

• Quick Ratio

Quick Ratio = (Current Assets – Inventory – Prepaid Expenses) / (Current Liabilities)

Q1 2022: (2,531,867 – 1,570,552 – 114,075) / 1,599,747 = 0.53

Q2 2022: (2,442,913- 1,666,130 – 123,014 – 39,029) / 1,502,054 = 0.41

Overall, the company’s quick ratio in the last two quarters is below 1, which indicates that it may not be able to pay off its current obligations using only quick assets. In quarter 2, the quick ratio declined, hence the need for the management to remedy the situation before it affects the firm’s financial performance in the long run.

• Cash Ratio

Cash Ratio = (Cash + Cash Equivalents/Current Liabilities)

Q1 2022: 654,486 / 1,599,747 = 0.41:1

Q2 2022: 434,226 / 1,502,054 = 0.29:1

The company has a ratio under 0.5 which is considered risky as the entity has twice as much short-term debt compared to cash. The ratio has decreased tremendously over the last quarter.

Solvency Analysis

Debt-to-Assets Ratio

Total liabilities / total assets

Q1 2022: 3,266,416 / 5,012,036 = 65.17%

Q2 2022: 3,176,926 / 4,945,994 = 64.23%

For Q1, 65.17% of the firm was financed by debt while 34.83% of the firm’s assets were financed by the investors.   This changed in quarter 2, with only 64.23% of the firm financed by debt and 35.77% of the firm’s assets were financed by investors. This was a slight improvement in the firm’s financial health over the last two quarters.

Interest Coverage Ratio

Interest Coverage Ratio = EBITDA / Interest Expense

Q1 2022: $437.7 M / $401 T = 1,091.5x

Q2 2022: $391.4 M / -$108 T = −3,624.3x

Equity Ratio

Total Equity / Total Assets

Q1 2022: 1,745,620 / 5,012,036 = .34

Q2 2022: 1,769,068 / 4,945,994 = .35

This firm is a leveraged company because the ratio is less than .5. Investors prefer to lend to firms with a higher equity ratio and not the leveraged companies.

References

EDGAR. (2022). Ulta Beauty, Inc. Sec.gov. https://www.sec.gov/edgar/browse/?CIK=1403568&owner=exclude

Access Ulta’s company quarterly financial statements (10-Q) for the past two quarters on EDGAR, which is available on the web page https://www.sec.gov/edgar/searchedgar/companysearch • Prepare a solvency analysis by computing and using the appropriate ratios to assess solvency. ◦ Compute a minimum of three ratios and show your supporting calculations. • Prepare a profitability analysis by computing and using the appropriate ratios to assess profitability. ◦ Compute a minimum of three ratios and show your supporting calculations.

The following is the solvency and profitability analysis of Ulta’s company using its quarterly financial statements (EDGAR, 2022).

Solvency Analysis

1. Debt-to-Assets Ratio

Total liabilities / total assets

Q1 2022: 3,266,416 / 5,012,036 = 65.17%

Q2 2022: 3,176,926 / 4,945,994 = 64.23%

For Q1, 65.17% of the firm was financed by debt while 34.83% of the firm’s assets were financed by the investors, which improved in the following quarter indicating a better financial health in quarter 2, 2022.

• Interest Coverage Ratio

Interest Coverage Ratio = EBITDA / Interest Expense

Q1 2022: 437,708 / 401 = 1,091.5x

Q2 2022: 391,428 / (108) = −3,624.3x

The firm is more poised to pay its debts.

• Equity Ratio

Total Equity / Total Assets

Q1 2022: 1,745,620 / 5,012,036 = .34

Q2 2022: 1,769,068 / 4,945,994 = .35

This firm is considered a leveraged company and investors would not freely lend money to the company compared to firms with a ratio above .5.

Profitability Analysis

1. Gross Profit Margin

Gross profit margin = (total sales – cost of goods sold) ÷ total sales

Q1 2022: 941,026 / 2,345,901 = 40%

Q2 2022: 928,164 / 2,297,113 = 40%

The gross profit margin for both quarters is equal, but still less than an acceptable range of 50 to 70%. For this reason, the firm, for every dollar generated, $0.6 would go into the cost of goods sold, while the remaining $0.6 could be used to pay back expenses, taxes, etc. This is not a healthy position financially.

• Operating Profit Margin

Operating profit margin = operating profit ÷ revenue

Q1 2022: 437,708 / 2,345,901 = 18.66%

Q2 2022: 391,428 / 2,297,113 = 17.04%

The firm had high quality of earnings in quarter 1 compared to quarter 2. The firm should focus on ways to reduce operating costs.

• Net Profit Margin

Net profit margin = net income ÷ revenue

Q1 2022: 331,395 / 2,345,901 = 14.13%

Q2 2022:  295,677 / 2,297,113 = 12.87%

For quarter 2, for every $1 of revenue, the company earns $0.13 in net profit. This is a decline from the previous net profit margin of 14%.

References

EDGAR. (2022). Ulta Beauty, Inc. Sec.gov. https://www.sec.gov/edgar/browse/?CIK=1403568&owner=exclude