UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 10-Q
 þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the Quarterly Period Ended November 1, 2008
 or
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from__________________ to__________________
 Commission File Number: 001-33764
 ULTA SALON, COSMETICS & FRAGRANCE, INC.
  Delaware
(State or other jurisdiction of 
incorporation or organization)
    
    36-3685240
(I.R.S. Employer
Identification No.)1000 Remington Blvd., Suite 120
Bolingbrook, Illinois
(Address of principal executive offices)
    
    60440
(Zip code)
  þ o
  Large accelerated filer oAccelerated filer oNon-accelerated filer þ(Do not check if a smaller reporting company)Smaller reporting company o o þ




---



##### 



ULTA SALON, COSMETICS & FRAGRANCE, INC.
TABLE OF CONTENTS
 Part I   Financial InformationItem 1. Consolidated Financial StatementsConsolidated Balance Sheets
    
    
    3Consolidated Statements of Income
    
    
    5Consolidated Statements of Cash Flows
    
    
    6Consolidated Statements of Stockholders Equity
    
    
    8Notes to Consolidated Financial Statements
    
    
    9Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    24Item 4. Controls and Procedures
    
    
    25Part II   Other Information
    
    
    25Item 1. Legal Proceedings
    
    
    25Item 1A. Risk Factors
    
    
    25Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    26Item 3. Defaults Upon Senior Securities
    
    
    26Item 4. Submission of Matters to a Vote of Security Holders
    
    
    26Item 5. Other Information
    
    
    26Item 6. Exhibits
    
    
    26SIGNATURES
    
    
    27
  2




---



##### 



Part I  Financial Information
 
 Item 1. Consolidated Financial Statements
 
 Ulta Salon, Cosmetics & Fragrance, Inc.
Consolidated Balance Sheets
 November 1,
    
    February 2,
    
    November 3,(In thousands)
    
    2008
    
    2008
    
    2007(unaudited)
    
    
    
    
    
    (unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    3,648
    
    
    $
    3,789
    
    
    $
    3,512Receivables, net
    
    
    20,488
    
    
    
    20,643
    
    
    
    16,089Merchandise inventories, net
    
    
    268,928
    
    
    
    176,109
    
    
    
    219,453Prepaid expenses and other current assets
    
    
    24,960
    
    
    
    19,184
    
    
    
    27,726Deferred income taxes
    
    
    9,088
    
    
    
    9,219
    
    
    
    5,614Total current assets
    
    
    327,112
    
    
    
    228,944
    
    
    
    272,394Property and equipment, net
    
    
    292,120
    
    
    
    236,389
    
    
    
    226,533Deferred income taxes
    
    
    4,080
    
    
    
    4,080
    
    
    
    4,125Total assets
    
    $
    623,312
    
    
    $
    469,413
    
    
    $
    503,052Liabilities and stockholders equityCurrent liabilities:Current portion  notes payable
    
    $
    51,590
    
    
    $
    
    
    
    $
    41,962Accounts payable
    
    
    97,768
    
    
    
    52,122
    
    
    
    85,985Accrued liabilities
    
    
    50,532
    
    
    
    54,719
    
    
    
    55,669Accrued income taxes
    
    
    5,798
    
    
    
    5,064
    
    
    
    Total current liabilities
    
    
    205,688
    
    
    
    111,905
    
    
    
    183,616Notes payable  less current portion
    
    
    86,390
    
    
    
    74,770
    
    
    
    55,038Deferred rent
    
    
    100,126
    
    
    
    71,235
    
    
    
    66,655Total liabilities
    
    
    392,204
    
    
    
    257,910
    
    
    
    305,309Commitments and contingencies
 See accompanying notes to consolidated financial statements.
 3




---



##### 



Ulta Salon, Cosmetics & Fragrance, Inc.
Consolidated Balance Sheets (continued)
 November 1,
    
    February 2,
    
    November 3,(In thousands, except per share data)
    
    2008
    
    2008
    
    2007(unaudited)
    
    
    
    
    
    (unaudited)Stockholders equity:Common stock, $.01 par value, 400,000 shares
authorized; 58,168, 57,411 and 57,276 shares
issued; 57,663, 56,906 and 56,771 shares
outstanding; at November 1, 2008 (unaudited),
February 2, 2008 and November 3, 2007
(unaudited), respectively
    
    $
    582
    
    
    $
    574
    
    
    $
    573Treasury stock-common, at cost
    
    
    (4,179
    )
    
    
    (4,179
    )
    
    
    (4,179
    )Additional paid-in capital
    
    
    291,362
    
    
    
    284,951
    
    
    
    284,362Accumulated deficit
    
    
    (56,144
    )
    
    
    (69,124
    )
    
    
    (82,728
    )Accumulated other comprehensive loss
    
    
    (513
    )
    
    
    (719
    )
    
    
    (285
    )Total stockholders equity
    
    
    231,108
    
    
    
    211,503
    
    
    
    197,743Total liabilities and stockholders equity
    
    $
    623,312
    
    
    $
    469,413
    
    
    $
    503,052
 See accompanying notes to consolidated financial statements.
 4




---



##### 



Ulta Salon, Cosmetics & Fragrance, Inc.
Consolidated Statements of Income
(unaudited)
 Three months ended
    
    Nine months endedNovember 1,
    
    November 3,
    
    November 1,
    
    November 3,(In thousands, except per share data)
    
    2008
    
    2007
    
    2008
    
    2007Net sales
    
    $
    254,843
    
    
    $
    208,235
    
    
    $
    743,252
    
    
    $
    602,797Cost of sales
    
    
    175,368
    
    
    
    140,156
    
    
    
    516,710
    
    
    
    416,173Gross profit
    
    
    79,475
    
    
    
    68,079
    
    
    
    226,542
    
    
    
    186,624Selling, general and administrative expenses
    
    
    65,176
    
    
    
    55,609
    
    
    
    189,130
    
    
    
    154,779Pre-opening expenses
    
    
    4,693
    
    
    
    4,494
    
    
    
    12,515
    
    
    
    9,064Operating income
    
    
    9,606
    
    
    
    7,976
    
    
    
    24,897
    
    
    
    22,781Interest expense
    
    
    1,124
    
    
    
    1,307
    
    
    
    3,055
    
    
    
    3,465Income before income taxes
    
    
    8,482
    
    
    
    6,669
    
    
    
    21,842
    
    
    
    19,316Income tax expense
    
    
    3,465
    
    
    
    2,463
    
    
    
    8,862
    
    
    
    7,585Net income
    
    $
    5,017
    
    
    $
    4,206
    
    
    $
    12,980
    
    
    $
    11,731Less preferred stock dividends
    
    
    
    
    
    
    3,598
    
    
    
    
    
    
    
    11,219Net income available to common stockholders
    
    $
    5,017
    
    
    $
    608
    
    
    $
    12,980
    
    
    $
    512Net income per common share:Basic
    
    $
    0.09
    
    
    $
    0.06
    
    
    $
    0.23
    
    
    $
    0.06Diluted
    
    $
    0.09
    
    
    $
    0.05
    
    
    $
    0.22
    
    
    $
    0.05Weighted average common shares outstanding:Basic
    
    
    57,591
    
    
    
    10,179
    
    
    
    57,328
    
    
    
    8,252Diluted
    
    
    59,013
    
    
    
    12,476
    
    
    
    59,005
    
    
    
    10,447
 See accompanying notes to consolidated financial statements.
 5




---



##### 



Ulta Salon, Cosmetics & Fragrance, Inc.
Consolidated Statements of Cash Flows
(unaudited)
 Nine months endedNovember 1,
    
    November 3,(Dollars in thousands)
    
    2008
    
    2007Operating activitiesNet income
    
    $
    12,980
    
    
    $
    11,731Adjustments to reconcile net income to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    37,619
    
    
    
    28,597Non-cash stock compensation charges
    
    
    2,644
    
    
    
    1,635Excess tax benefits from stock-based compensation
    
    
    (1,565
    )
    
    
    (1,542
    )Loss (gain) on disposal of property and equipment
    
    
    219
    
    
    
    (11
    )Change in operating assets and liabilities:Receivables
    
    
    155
    
    
    
    2,387Merchandise inventories
    
    
    (92,819
    )
    
    
    (90,216
    )Prepaid expenses and other assets
    
    
    (5,776
    )
    
    
    (10,596
    )Accounts payable
    
    
    45,646
    
    
    
    42,914Accrued liabilities
    
    
    1,488
    
    
    
    (4,065
    )Deferred rent
    
    
    28,891
    
    
    
    16,288Net cash provided by (used in) operating activities
    
    
    29,482
    
    
    
    (2,878
    )Investing activitiesPurchases of property and equipment
    
    
    (96,608
    )
    
    
    (74,648
    )Receipt of related party notes receivable
    
    
    
    
    
    
    4,467Net cash used in investing activities
    
    
    (96,608
    )
    
    
    (70,181
    )Financing activitiesProceeds on long-term borrowings
    
    
    874,139
    
    
    
    750,262Payments on long-term borrowings
    
    
    (810,929
    )
    
    
    (703,999
    )Proceeds from issuance of common stock under
stock plans
    
    
    2,269
    
    
    
    953Excess tax benefits from stock-based compensation
    
    
    1,565
    
    
    
    1,542Proceeds from issuance of common stock in initial
public offering, net of issuance costs
    
    
    (59
    )
    
    
    123,921Payment of accumulated dividends in arrears
    
    
    
    
    
    
    (93,012
    )Redemption of Series III preferred stock
    
    
    
    
    
    
    (4,792
    )Purchase of treasury stock
    
    
    
    
    
    
    (1,949
    )Net cash provided by financing activities
    
    
    66,985
    
    
    
    72,926Net decrease in cash and cash equivalents
    
    
    (141
    )
    
    
    (133
    )Cash and cash equivalents at beginning of period
    
    
    3,789
    
    
    
    3,645Cash and cash equivalents at end of period
    
    $
    3,648
    
    
    $
    3,512
 See accompanying notes to consolidated financial statements.
 6




---



##### 



Ulta Salon, Cosmetics & Fragrance, Inc.
Consolidated Statements of Cash Flows (continued)
(unaudited)
 Nine months endedNovember 1,
    
    November 3,(Dollars in thousands)
    
    2008
    
    2007Supplemental cash flow informationCash paid for interest
    
    $
    3,437
    
    
    $
    3,863Cash paid for income taxes
    
    $
    6,589
    
    
    $
    16,486Noncash investing and financing activities:Change in property and equipment included in
accrued liabilities
    
    $
    (3,039
    )
    
    $
    18,390Unrealized gain (loss) on interest rate swap hedge,
net of tax
    
    $
    206
    
    
    $
    (304
    )
 See accompanying notes to consolidated financial statements.
 7




---



##### 



Ulta Salon, Cosmetics & Fragrance, Inc.
Consolidated Statements of Stockholders Equity
(unaudited)
 Treasury 
    
    
    
    
    
    
    
    
    
    
    AccumulatedCommon Stock
    
    
    Common Stock
    
    
    Additional
    
    
    
    
    
    
    Other
    
    
    TotalIssued
    
    
    
    
    
    
    Treasury
    
    
    
    
    
    
    Paid-In
    
    
    Accumulated
    
    
    Comprehensive
    
    
    Stockholders(In thousands)
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    Loss
    
    
    EquityBalance  February 2, 2008
    
    
    57,411
    
    
    $
    574
    
    
    
    (505
    )
    
    $
    (4,179
    )
    
    $
    284,951
    
    
    $
    (69,124
    )
    
    $
    (719
    )
    
    $
    211,503Common stock options exercised
    
    
    757
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    2,261
    
    
    
    
    
    
    
    
    
    
    
    2,269Unrealized gain on interest rate swap hedge,
net of $131 income tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    206
    
    
    
    206Net income for the nine months ended November 1,
2008
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,980
    
    
    
    
    
    
    
    12,980Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,186Excess tax benefits from stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,565
    
    
    
    
    
    
    
    
    
    
    
    1,565Stock compensation charge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,644
    
    
    
    
    
    
    
    
    
    
    
    2,644Initial public offering issuance costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (59
    )
    
    
    
    
    
    
    
    
    
    
    (59
    )Balance  November 1, 2008
    
    
    58,168
    
    
    $
    582
    
    
    
    (505
    )
    
    $
    (4,179
    )
    
    $
    291,362
    
    
    $
    (56,144
    )
    
    $
    (513
    )
    
    $
    231,108
 See accompanying notes to consolidated financial statements.
 8




---



##### 



Ulta Salon, Cosmetics & Fragrance, Inc.
Notes to Consolidated Financial Statements
(unaudited)
 1. Business and basis of presentation
    NumberState
    
    of storesAlabama
    
    
    6Arizona
    
    
    22California
    
    
    28Colorado
    
    
    10Delaware
    
    
    1Florida
    
    
    20Georgia
    
    
    16Illinois
    
    
    31Indiana
    
    
    6Iowa
    
    
    2Kansas
    
    
    1Kentucky
    
    
    2Louisiana
    
    
    2Maryland
    
    
    6Massachusetts
    
    
    3Michigan
    
    
    8Minnesota
    
    
    6Missouri
    
    
    2Nebraska
    
    
    2Nevada
    
    
    6New Jersey
    
    
    9New York
    
    
    9North Carolina
    
    
    12Ohio
    
    
    5Oklahoma
    
    
    6Oregon
    
    
    3Pennsylvania
    
    
    13Rhode Island
    
    
    1South Carolina
    
    
    4Tennessee
    
    
    3Texas
    
    
    42Utah
    
    
    2Virginia
    
    
    9Washington
    
    
    4Wisconsin
    
    
    2Total
    
    
    304
    9




---



##### 



Reverse stock split
  Initial public offering
  2. Summary of significant accounting policies
  Fiscal quarter
  Share-based compensation
 Share-Based Payment
 Share-Based Payment Simplified Method for Plain
Vanilla Share Options,
 10




---



##### 



Nine months endedNovember 1, 2008
    
    November 3, 2007Volatility rate
    
    
    39%  43%
    
    
    
    34%  45%Risk-free interest rate
    
    
    1.67%  3.59%
    
    
    
    4.12%  5.05%Average expected life (years)
    
    
    4.9
    
    
    
    4.9Dividend yield
    
    None
    
    None
   Income taxes
 Accounting for Uncertainty in Income Taxes,
 Comprehensive income
  Three months ended
    
    Nine months endedNovember 1,
    
    November 3,
    
    November 1,
    
    November 3,2008
    
    2007
    
    2008
    
    2007Net income
    
    $
    5,017
    
    
    $
    4,206
    
    
    $
    12,980
    
    
    $
    11,731Unrealized (loss) gain on interest
rate swap hedge, net of income
tax
    
    
    (37
    )
    
    
    (209
    )
    
    
    206
    
    
    
    (304
    )Comprehensive income
    
    $
    4,980
    
    
    $
    3,997
    
    
    $
    13,186
    
    
    $
    11,427
 Recent accounting pronouncements
 Disclosures about Derivative Instruments and Hedging
Activities  an amendment of SFAS No. 133.
 11




---



##### 



3. Commitments and contingencies
 Leases 
 Securities litigation 
  General litigation
 4. Notes payable
      5. Financial instruments
  12




---



##### 



Fair Value Measurements,
 
    
    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.
  Fair value measurement usingLevel 1
    
    Level 2
    
    Level 3Interest rate swap liability
    
    $
    
    
    
    $
    847
    
    
    $
    
 13




---



##### 



6. Net income per common share
  Three months ended
    
    Nine months endedNovember 1,
    
    November 3,
    
    November 1,
    
    November 3,2008
    
    2007
    
    2008
    
    2007Numerator for diluted net income per share
 net income
    
    $
    5,017
    
    
    $
    4,206
    
    
    $
    12,980
    
    
    $
    11,731Less preferred stock dividends
    
    
    
    
    
    
    3,598
    
    
    
    
    
    
    
    11,219Numerator for basic net income per share
    
    $
    5,017
    
    
    $
    608
    
    
    $
    12,980
    
    
    $
    512Denominator for basic net income per share 
weighted-average common shares
    
    
    57,591
    
    
    
    10,179
    
    
    
    57,328
    
    
    
    8,252Dilutive effect of stock options and
non-vested stock
    
    
    1,422
    
    
    
    2,297
    
    
    
    1,677
    
    
    
    2,195Denominator for diluted net income per share
    
    
    59,013
    
    
    
    12,476
    
    
    
    59,005
    
    
    
    10,447Net income per common share:Basic
    
    $
    0.09
    
    
    $
    0.06
    
    
    $
    0.23
    
    
    $
    0.06Diluted
    
    $
    0.09
    
    
    $
    0.05
    
    
    $
    0.22
    
    
    $
    0.05
    14




---



##### 



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 consolidated 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 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, 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 or expectations contemplated by us will be
achieved. Such forward-looking statements are subject to various risks and uncertainties, which
include, without limitation: the impact of weakness in the economy; changes in the overall level
of consumer spending; changes in the wholesale cost of our products; the possibility that we may be
unable to compete effectively in our highly competitive markets; the possibility that our continued
opening of new stores could strain our resources and have a material adverse effect on our business
and financial performance; the possibility that new store openings may be impacted by developer or
co-tenant issues; the possibility that the capacity of our distribution and order fulfillment
infrastructure may not be adequate to support our recent growth and expected future growth plans;
the possibility of material disruptions to our information systems; weather conditions that could
negatively impact sales and other risk factors detailed in our public filings with the Securities
and Exchange Commission (the SEC), including risk factors contained in our Annual Report on Form
10-K for the year ended February 2, 2008. We assume no obligation to update any forward-looking
statements as a result of new information, future events or developments. References in the
following discussion to we, us, our, the Company, Ulta and similar references mean Ulta
Salon, Cosmetics & Fragrance, Inc. unless otherwise expressly stated or the context otherwise
requires.
 Overview
       15




---



##### 



Basis of presentation
    
    
    the introduction of new products or brands;
    
    the location of new stores in existing store markets;
    
    competition;
    
    our ability to respond on a timely basis to changes in consumer preferences;
    
    the effectiveness of our various marketing activities; and
    
    the number of new stores opened and the impact on the average age of all of our
comparable stores.
  
    
    the cost of merchandise sold, including all vendor allowances, which are treated as a
reduction of merchandise costs;
 16




---



##### 




    
    warehousing and distribution costs including labor and related benefits, freight, rent,
depreciation and amortization, real estate taxes, utilities, and insurance;
    
    store occupancy costs including rent, depreciation and amortization, real estate taxes,
utilities, repairs and maintenance, insurance, licenses, and cleaning expenses;
    
    salon payroll and benefits; and
    
    shrink and inventory valuation reserves.
    
    
    payroll, bonus, and benefit costs for retail and corporate employees;
    
    advertising and marketing costs;
    
    occupancy costs related to our corporate office facilities;
    
    public company expense including Sarbanes-Oxley compliance expenses;
    
    stock-based compensation expense related to option grants which will result in increases
in expense as we implemented a structured stock option compensation program in 2007;
    
    depreciation and amortization for all assets except those related to our retail and
warehouse operations which is included in cost of sales; and
    
    legal, finance, information systems and other corporate overhead costs.
     17




---



##### 



Results of operations
   Three months ended
    
    Nine months endedNovember 1,
    
    November 3,
    
    November 1,
    
    November 3,(Dollars in thousands)
    
    2008
    
    2007
    
    2008
    
    2007Net sales
    
    $
    254,843
    
    
    $
    208,235
    
    
    $
    743,252
    
    
    $
    602,797Cost of sales
    
    
    175,368
    
    
    
    140,156
    
    
    
    516,710
    
    
    
    416,173Gross profit
    
    
    79,475
    
    
    
    68,079
    
    
    
    226,542
    
    
    
    186,624Selling, general and
administrative expenses
    
    
    65,176
    
    
    
    55,609
    
    
    
    189,130
    
    
    
    154,779Pre-opening expenses
    
    
    4,693
    
    
    
    4,494
    
    
    
    12,515
    
    
    
    9,064Operating income
    
    
    9,606
    
    
    
    7,976
    
    
    
    24,897
    
    
    
    22,781Interest expense
    
    
    1,124
    
    
    
    1,307
    
    
    
    3,055
    
    
    
    3,465Income before income taxes
    
    
    8,482
    
    
    
    6,669
    
    
    
    21,842
    
    
    
    19,316Income tax expense
    
    
    3,465
    
    
    
    2,463
    
    
    
    8,862
    
    
    
    7,585Net income
    
    $
    5,017
    
    
    $
    4,206
    
    
    $
    12,980
    
    
    $
    11,731Other operating data:Number stores end of period
    
    
    304
    
    
    
    237
    
    
    
    304
    
    
    
    237Comparable store sales increase
    
    
    2.0
    %
    
    
    6.7
    %
    
    
    3.2
    %
    
    
    7.4
    %
 Three months ended
    
    Nine months endedNovember 1,
    
    November 3,
    
    November 1,
    
    November 3,(Percentage of net sales)
    
    2008
    
    2007
    
    2008
    
    2007Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    68.8
    %
    
    
    67.3
    %
    
    
    69.5
    %
    
    
    69.0
    %Gross profit
    
    
    31.2
    %
    
    
    32.7
    %
    
    
    30.5
    %
    
    
    31.0
    %Selling, general and
administrative expenses
    
    
    25.6
    %
    
    
    26.7
    %
    
    
    25.4
    %
    
    
    25.7
    %Pre-opening expenses
    
    
    1.8
    %
    
    
    2.2
    %
    
    
    1.7
    %
    
    
    1.5
    %Operating income
    
    
    3.8
    %
    
    
    3.8
    %
    
    
    3.3
    %
    
    
    3.8
    %Interest expense
    
    
    0.4
    %
    
    
    0.6
    %
    
    
    0.4
    %
    
    
    0.6
    %Income before income taxes
    
    
    3.3
    %
    
    
    3.2
    %
    
    
    2.9
    %
    
    
    3.2
    %Income tax expense
    
    
    1.4
    %
    
    
    1.2
    %
    
    
    1.2
    %
    
    
    1.3
    %Net income
    
    
    2.0
    %
    
    
    2.0
    %
    
    
    1.7
    %
    
    
    1.9
    %
 18




---



##### 



Comparison of three months ended November 1, 2008 to three months ended November 3, 2007
 Net sales
  Gross profit
  Selling, general and administrative expenses
  Pre-opening expenses
  Interest expense
  Income tax expense
  Net income
  19




---



##### 



Comparison of nine months ended November 1, 2008 to nine months ended November 3, 2007
 Net sales
  Gross profit
  Selling, general and administrative expenses
  Pre-opening expenses
  Interest expense
  Income tax expense
  Net income
  20




---



##### 



Liquidity and capital resources
      Credit facility
     21




---



##### 



Operating activities
  Nine months endedNovember 1,
    
    November 3,(Dollars in thousands)
    
    2008
    
    2007Net income
    
    $
    12,980
    
    
    $
    11,731Items not affecting cash:Depreciation and amortization
    
    
    37,619
    
    
    
    28,597Non-cash stock compensation charges
    
    
    2,644
    
    
    
    1,635Excess tax benefits from stock-based compensation
    
    
    (1,565
    )
    
    
    (1,542
    )Loss (gain) on disposal of property and equipment
    
    
    219
    
    
    
    (11
    )Changes in working capital items
    
    
    (22,415
    )
    
    
    (43,288
    )Net cash provided by (used in) operating activities
    
    $
    29,482
    
    
    $
    (2,878
    )
  Investing activities
  Nine months endedNovember 1,
    
    November 3,(Dollars in thousands)
    
    2008
    
    2007Purchases of property and equipment
    
    $
    (96,608
    )
    
    $
    (74,648
    )Receipt of related party notes receivable
    
    
    
    
    
    
    4,467Net cash used in investing activities
    
    $
    (96,608
    )
    
    $
    (70,181
    )
  22




---



##### 



Financing activities
  Nine months endedNovember 1,
    
    November 3,(Dollars in thousands)
    
    2008
    
    2007Proceeds on long-term borrowings
    
    $
    874,139
    
    
    $
    750,262Payments on long-term borrowings
    
    
    (810,929
    )
    
    
    (703,999
    )Proceeds from issuance of common stock under
stock plans
    
    
    2,269
    
    
    
    953Excess tax benefits from stock-based compensation
    
    
    1,565
    
    
    
    1,542Proceeds from issuance of common stock in initial
public offering, net of issuance costs
    
    
    (59
    )
    
    
    123,921Payment of accumulated dividends in arrears
    
    
    
    
    
    
    (93,012
    )Redemption of Series III preferred stock
    
    
    
    
    
    
    (4,792
    )Purchase of treasury stock
    
    
    
    
    
    
    (1,949
    )Net cash provided by financing activities
    
    $
    66,985
    
    
    $
    72,926
  Contractual obligations
  Off-balance sheet arrangements
  23




---



##### 



Critical accounting policies and estimates
  Share-based compensation
 Share-Based Payment
 Share-Based Payment Simplified Method for
Plain Vanilla Share Options,
  Recent accounting pronouncements
 Disclosures about Derivative Instruments and Hedging
Activities  an amendment of SFAS No. 133.
 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
  Interest rate sensitivity
  24




---



##### 



Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control.
 
 Part II   Other Information
 
 Item 1. Legal Proceedings
 Securities litigation 
  General litigation 
 
 Item 1A. Risk Factors
  Economic conditions may cause a decline in general business conditions and consumer spending which
could adversely affect our business and results of operations
  25




---



##### 



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
 Exhibitnumber
    
    Description of document3.1
    
    Amended and Restated Certificate of Incorporation
(incorporated by reference to Exhibit 3.1 to the Companys
Registration Statement on Form S-1 (file No. 333-144405)
filed with the Securities and Exchange Commission on August
17, 2007).3.2
    
    Amended and Restated Bylaws (incorporated by reference to
Exhibit 3.2 to the Companys Registration Statement on Form
S-1 (file No. 333-144405) filed with the Securities and
Exchange Commission on August 17, 2007).4.1
    
    Specimen Common Stock Certificate (incorporated by
reference to Exhibit 4.1 to the Companys Registration
Statement on Form S-1 (file No. 333-144405) filed with the
Securities and Exchange Commission on October 11, 2007).4.2
    
    Third Amended and Restated Registration Rights Agreement
between Ulta Salon, Cosmetics & Fragrance, Inc. and the
stockholders party thereto (incorporated by reference to
Exhibit 4.2 to the Companys Registration Statement on Form
S-1 (file No. 333-144405) filed with the Securities and
Exchange Commission on August 17, 2007).4.3
    
    Stockholder Rights Agreement (incorporated by reference to
Exhibit 4.4 to the Companys Registration Statement on Form
S-1 (file No. 333-144405) filed with the Securities and
Exchange Commission on August 17, 2007).31.1
    
    Certification of the Chief Executive Officer pursuant to
Rules 13a-14(a) and 15d-14(a) of the Securities Exchange
Act of 1934, as adopted pursuant to section 302 of the
Sarbanes-Oxley Act of 2002.31.2
    
    Certification of the Chief Financial Officer pursuant to
Rules 13a-14(a) and 15d-14(a) of the Securities Exchange
Act of 1934, as adopted pursuant to section 302 of the
Sarbanes-Oxley Act of 2002.32.1
    
    Certification of the Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
 26




---



##### 



SIGNATURES
  ULTA SALON, COSMETICS & FRAGRANCE, INC.By:
    /s/ Lynelle P. KirbyLynelle P. KirbyPresident, Chief Executive Officer and DirectorBy:
    /s/ Gregg R. BodnarGregg R. BodnarChief Financial Officer 27