##### 



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 3, 2007
 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)1135 Arbor Drive 
Romeoville, Illinois
(Address of principal executive offices)
    
    36-3685240
(I.R.S. Employer
Identification No.)60446
(Zip code)
  o þ
  o o þ
 o þ




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##### 



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
    
    
    10Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    25Item 4. Controls and Procedures
    
    
    25Part II   Other Information
    
    
    26Item 1. Legal Proceedings
    
    
    26Item 1A. Risk Factors
    
    
    26Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    35Item 3. Defaults Upon Senior Securities
    
    
    35Item 4. Submission of Matters to a Vote of Security Holders
    
    
    35Item 5. Other Information
    
    
    36Item 6. Exhibits
    
    
    36SIGNATURES
    
    
    37
  2




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##### 



Part I Financial Information
 
 Item 1. Consolidated Financial Statements
 Ulta Salon, Cosmetics & Fragrance, Inc.
 
 Consolidated Balance Sheets
 November 3,
    
    February 3,
    
    October 28,(Dollars in thousands, except per share data)
    
    2007
    
    2007
    
    2006(unaudited)
    
    
    
    
    
    (unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    3,512
    
    
    $
    3,645
    
    
    $
    3,221Receivables, net
    
    
    16,089
    
    
    
    18,476
    
    
    
    13,905Merchandise inventories
    
    
    219,453
    
    
    
    129,237
    
    
    
    156,788Prepaid expenses and other current assets
    
    
    27,726
    
    
    
    15,276
    
    
    
    17,526Deferred income taxes
    
    
    5,614
    
    
    
    5,412
    
    
    
    3,285Total current assets
    
    
    272,394
    
    
    
    172,046
    
    
    
    194,725Property and equipment, net
    
    
    226,533
    
    
    
    162,080
    
    
    
    159,114Deferred income taxes
    
    
    4,125
    
    
    
    4,125
    
    
    
    5,875Other assets
    
    
    
    
    
    
    346
    
    
    
    292Total assets
    
    $
    503,052
    
    
    $
    338,597
    
    
    $
    360,006Liabilities and stockholders equityCurrent liabilities:Current portion  notes payable
    
    $
    41,962
    
    
    $
    
    
    
    $
    33,485Accounts payable
    
    
    85,985
    
    
    
    43,071
    
    
    
    60,251Accrued liabilities
    
    
    55,669
    
    
    
    38,604
    
    
    
    38,933Accrued income taxes
    
    
    
    
    
    
    2,266
    
    
    
    Total current liabilities
    
    
    183,616
    
    
    
    83,941
    
    
    
    132,669Notes payable  less current portion
    
    
    55,038
    
    
    
    50,737
    
    
    
    37,826Deferred rent
    
    
    66,655
    
    
    
    50,367
    
    
    
    47,146Total liabilities
    
    
    305,309
    
    
    
    185,045
    
    
    
    217,641Commitments and contingencies
    
    
    
    
    
    
    
    
    
    
    Series III redeemable preferred stock
    
    
    
    
    
    
    4,792
    
    
    
    4,792
 See accompanying notes to consolidated financial statements.
 3




---



##### 



Ulta Salon, Cosmetics & Fragrance, Inc.
 Consolidated Balance Sheets (continued)
 November 3,
    
    February 3,
    
    October 28,(Dollars in thousands, except per share data)
    
    2007
    
    2007
    
    2006(unaudited)
    
    
    
    
    
    (unaudited)Stockholders equity:Preferred stock
    
    $
    
    
    
    $
    223,059
    
    
    $
    219,054Treasury stock-preferred, at cost
    
    
    
    
    
    
    (12
    )
    
    
    (12
    )Common stock, $.01 par value 400,000,000 shares
authorized; 57,276,412, 7,409,302 and 6,833,740
shares issued; 56,771,241, 7,167,183 and
6,833,234 shares outstanding at November 3,
2007 (unaudited), February 3, 2007 and
October 28, 2006 (unaudited), respectively
    
    
    573
    
    
    
    117
    
    
    
    109Treasury stock-common, at cost
    
    
    (4,179
    )
    
    
    (2,217
    )
    
    
    Additional paid-in capital
    
    
    284,362
    
    
    
    15,501
    
    
    
    11,781Related party notes receivable
    
    
    
    
    
    
    (4,467
    )
    
    
    (4,467
    )Accumulated deficit
    
    
    (82,728
    )
    
    
    (83,240
    )
    
    
    (88,897
    )Accumulated other comprehensive income (loss)
    
    
    (285
    )
    
    
    19
    
    
    
    5Total stockholders equity
    
    
    197,743
    
    
    
    148,760
    
    
    
    137,573Total liabilities and stockholders equity
    
    $
    503,052
    
    
    $
    338,597
    
    
    $
    360,006
 See accompanying notes to consolidated financial statements.
 4




---



##### 



Ulta Salon, Cosmetics & Fragrance, Inc.
 
 Consolidated Statements of Income
(unaudited)
 Three months ended
    
    Nine months endedNovember 3,
    
    October 28,
    
    November 3,
    
    October 28,(In thousands, except per share data)
    
    2007
    
    2006
    
    2007
    
    2006Net sales
    
    $
    208,235
    
    
    $
    166,075
    
    
    $
    602,797
    
    
    $
    488,101Cost of sales
    
    
    140,156
    
    
    
    115,332
    
    
    
    416,173
    
    
    
    337,238Gross profit
    
    
    68,079
    
    
    
    50,743
    
    
    
    186,624
    
    
    
    150,863Selling, general and administrative expenses
    
    
    55,609
    
    
    
    40,797
    
    
    
    154,779
    
    
    
    121,718Pre-opening expenses
    
    
    4,494
    
    
    
    2,901
    
    
    
    9,064
    
    
    
    5,328Operating income
    
    
    7,976
    
    
    
    7,045
    
    
    
    22,781
    
    
    
    23,817Interest expense
    
    
    1,307
    
    
    
    1,031
    
    
    
    3,465
    
    
    
    2,488Income before income taxes
    
    
    6,669
    
    
    
    6,014
    
    
    
    19,316
    
    
    
    21,329Income tax expense
    
    
    2,463
    
    
    
    2,397
    
    
    
    7,585
    
    
    
    8,448Net income
    
    $
    4,206
    
    
    $
    3,617
    
    
    $
    11,731
    
    
    $
    12,881Less preferred stock dividends
    
    
    3,598
    
    
    
    3,608
    
    
    
    11,219
    
    
    
    10,579Net income available to common
stockholders
    
    $
    608
    
    
    $
    9
    
    
    $
    512
    
    
    $
    2,302Net income per common share:Basic
    
    $
    0.06
    
    
    $
    0.00
    
    
    $
    0.06
    
    
    $
    0.42Diluted
    
    $
    0.05
    
    
    $
    0.00
    
    
    $
    0.05
    
    
    $
    0.26Weighted average common shares outstanding:Basic
    
    
    10,179
    
    
    
    6,652
    
    
    
    8,252
    
    
    
    5,422Diluted
    
    
    12,476
    
    
    
    8,354
    
    
    
    10,447
    
    
    
    49,283
 See accompanying notes to consolidated financial statements.
 5




---



##### 



Ulta Salon, Cosmetics & Fragrance, Inc.
 
 Consolidated Statements of Cash Flows
(unaudited)
 Nine months endedNovember 3,
    
    October 28,(Dollars in thousands)
    
    2007
    
    2006Operating activitiesNet income
    
    $
    11,731
    
    
    $
    12,881Adjustments to reconcile net income to net cash
(used in) provided by operating activities:Depreciation and amortization
    
    
    28,597
    
    
    
    20,159Deferred income taxes
    
    
    
    
    
    
    (2,694
    )Non-cash stock compensation charges
    
    
    1,635
    
    
    
    684Excess tax benefits from stock-based compensation
    
    
    (1,542
    )
    
    
    (2,818
    )(Gain) loss on disposal of property and equipment
    
    
    (11
    )
    
    
    1,827Change in operating assets and liabilities:Receivables
    
    
    2,387
    
    
    
    1,851Merchandise inventories
    
    
    (90,216
    )
    
    
    (47,414
    )Prepaid expenses and other assets
    
    
    (10,596
    )
    
    
    149Accounts payable
    
    
    42,914
    
    
    
    25,816Accrued liabilities
    
    
    (4,065
    )
    
    
    (5,380
    )Deferred rent
    
    
    16,288
    
    
    
    6,697Net cash (used in) provided by operating activities
    
    
    (2,878
    )
    
    
    11,758Investing activitiesPurchases of property and equipment, net
    
    
    (74,648
    )
    
    
    (38,246
    )Receipt of related party notes receivable
    
    
    4,467
    
    
    
    Issuance of related party notes receivable
    
    
    
    
    
    
    (2,414
    )Net cash used in investing activities
    
    
    (70,181
    )
    
    
    (40,660
    )Financing activitiesProceeds on long-term borrowings
    
    
    750,262
    
    
    
    551,928Payments on long-term borrowings
    
    
    (703,999
    )
    
    
    (525,997
    )Proceeds from issuance of common stock in initial
public offering, net of issuance costs
    
    
    123,921
    
    
    
    Payment of accumulated dividends in arrears
    
    
    (93,012
    )
    
    
    Redemption of Series III preferred stock
    
    
    (4,792
    )
    
    
    Purchase of treasury stock
    
    
    (1,949
    )
    
    
    Excess tax benefits from stock-based compensation
    
    
    1,542
    
    
    
    2,818Proceeds from issuance of common stock under
stock plans
    
    
    953
    
    
    
    535Net cash provided by financing activities
    
    
    72,926
    
    
    
    29,284Net (decrease) increase in cash and cash equivalents
    
    
    (133
    )
    
    
    382Cash and cash equivalents at beginning of period
    
    
    3,645
    
    
    
    2,839Cash and cash equivalents at end of period
    
    $
    3,512
    
    
    $
    3,221
 See accompanying notes to consolidated financial statements.
 6




---



##### 



Ulta Salon, Cosmetics & Fragrance, Inc.
Consolidated Statements of Cash Flows (continued)
(unaudited)
 Nine months endedNovember 3,
    
    October 28,(Dollars in thousands)
    
    2007
    
    2006Supplemental cash flow informationCash paid for interest
    
    $
    3,863
    
    
    $
    2,396Cash paid for income taxes
    
    $
    16,486
    
    
    $
    16,959Noncash investing and financing activities:Purchases of property and equipment included in
accrued liabilities
    
    $
    18,390
    
    
    $
    9,850Unrealized loss (gain) on interest rate swap hedge,
net of tax
    
    $
    304
    
    
    $
    (54
    )Issuance of related party notes receivable for exercise
of stock options
    
    $
    
    
    
    $
    (1,680
    )
 See accompanying notes to consolidated financial statements.
 7




---



##### 



Ulta Salon, Cosmetics & Fragrance, Inc.
 
 Consolidated Statements of Stockholders Equity
(unaudited)
 Series I
    
    Series II
    
    Series IV
    
    Series V
    
    Series VIConvertible, Voting,
    
    Convertible, Voting,
    
    Convertible, Voting,
    
    Convertible, Voting,
    
    Convertible, Voting,
    
    Total
    
    Treasury -Preferred Stock
    
    Preferred Stock
    
    Preferred Stock
    
    Preferred Stock
    
    Preferred Stock
    
    Preferred Stock
    
    Preferred StockPar Value
    
    $.01
    
    $.01
    
    $.01
    
    $.01
    
    $.01Authorized Shares
    
    17,207,532
    
    7,634,207
    
    19,183,653
    
    22,500,000
    
    4,600,000Issued
    
    
    
    
    
    Issued
    
    
    
    
    
    Issued
    
    
    
    
    
    Issued
    
    
    
    
    
    Issued
    
    
    
    
    
    Issued
    
    
    
    
    
    Treasury(Dollars in thousands, except per share data)
    
    Shares
    
    Amount
    
    Shares
    
    Amount
    
    Shares
    
    Amount
    
    Shares
    
    Amount
    
    Shares
    
    Amount
    
    Shares
    
    Amount
    
    Shares
    
    AmountBalance  February 3, 2007
    
    
    16,915,231
    
    
    $
    43,317
    
    
    
    7,634,207
    
    
    $
    74,455
    
    
    
    19,183,653
    
    
    $
    46,871
    
    
    
    21,447,959
    
    
    $
    56,079
    
    
    
    920,000
    
    
    $
    2,337
    
    
    
    66,101,050
    
    
    $
    223,059
    
    
    
    (38,095
    )
    
    $
    (12
    )Common stock options exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (360,425
    )
    
    
    (1,803
    )Accretion of preferred dividends
    
    
    
    
    
    
    3,107
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,590
    
    
    
    
    
    
    
    4,341
    
    
    
    
    
    
    
    181
    
    
    
    
    
    
    
    11,219
    
    
    
    
    
    
    
    Receipt of related party notes receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Unrealized loss on interest rate swap
hedge, net of $197 income tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income for the nine months ended
November 3, 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Excess tax benefits from stock-based
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock compensation charge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of deferred stock-based
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Restate par value of common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of common stock in initial public
offering,
net of issuance costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Payment of accumulated preferred dividends
in arrears
    
    
    
    
    
    
    (30,845
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (31,311
    )
    
    
    
    
    
    
    (29,663
    )
    
    
    
    
    
    
    (1,193
    )
    
    
    
    
    
    
    (93,012
    )
    
    
    
    
    
    
    Conversion of preferred stock to common stock
in conjunction with initial public offering
    
    
    (16,915,231
    )
    
    
    (15,579
    )
    
    
    (7,634,207
    )
    
    
    (74,455
    )
    
    
    (19,183,653
    )
    
    
    (19,150
    )
    
    
    (21,447,959
    )
    
    
    (30,757
    )
    
    
    (920,000
    )
    
    
    (1,325
    )
    
    
    (66,101,050
    )
    
    
    (141,266
    )
    
    
    398,520
    
    
    
    1,815Balance  November 3, 2007
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
 See accompanying notes to consolidated financial statements.
 8




---



##### 



Ulta Salon, Cosmetics & Fragrance, Inc.
 Consolidated Statements of Stockholders Equity (continued)
(unaudited)
 Treasury -Common Stock
    
    Common StockPar Value
    
    $.01
    
    
    
    
    
    
    
    
    
    
    
    
    
    Related
    
    
    
    
    
    AccumulatedAuthorized Shares
    
    400,000,000
    
    
    
    
    
    
    
    
    
    Additional
    
    Party
    
    
    
    
    
    Other
    
    TotalIssued
    
    
    
    
    
    Treasury
    
    
    
    
    
    Paid-In
    
    Notes
    
    Accumulated
    
    Comprehensive
    
    Stockholders(Dollars in thousands, except per share data)
    
    Shares
    
    Amount
    
    Shares
    
    Amount
    
    Capital
    
    Receivable
    
    Deficit
    
    Income (loss)
    
    EquityBalance  February 3, 2007
    
    
    7,409,302
    
    
    $
    117
    
    
    
    (242,119
    )
    
    $
    (2,217
    )
    
    $
    15,501
    
    
    $
    (4,467
    )
    
    $
    (83,240
    )
    
    $
    19
    
    
    $
    148,760Common stock options exercised
    
    
    424,576
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    949
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    953Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    (11,187
    )
    
    
    (147
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,950
    )Accretion of preferred dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,219
    )
    
    
    
    
    
    
    Receipt of related party notes receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,467
    
    
    
    
    
    
    
    
    
    
    
    4,467Unrealized loss on interest rate swap
hedge, net of $197 income tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (304
    )
    
    
    (304
    )Net income for the nine months ended
November 3, 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,731
    
    
    
    
    
    
    
    11,731Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,427Excess tax benefits from stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,542
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,542Stock compensation charge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,524
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,524Amortization of deferred stock-based
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    111
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    111Restate par value of common stock
    
    
    
    
    
    
    (43
    )
    
    
    
    
    
    
    
    
    
    
    43
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of common stock in initial public offering,
net of issuance costs
    
    
    7,666,667
    
    
    
    77
    
    
    
    
    
    
    
    
    
    
    
    123,844
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    123,921Payment of accumulated preferred dividends
in arrears
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (93,012
    )Conversion of preferred stock to common stock
in conjunction with initial public offering
    
    
    41,775,867
    
    
    
    418
    
    
    
    (251,865
    )
    
    
    (1,815
    )
    
    
    140,848
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance  November 3, 2007
    
    
    57,276,412
    
    
    $
    573
    
    
    
    (505,171
    )
    
    $
    (4,179
    )
    
    $
    284,362
    
    
    $
    
    
    
    $
    (82,728
    )
    
    $
    (285
    )
    
    $
    197,743
 See accompanying notes to consolidated financial statements.
 9




---



##### 



Ulta Salon, Cosmetics & Fragrance, Inc.
 
 Notes to Consolidated Financial Statements
(unaudited)
 1. Business and basis of presentation
   State
    
    Number of storesAlabama
    
    
    1Arizona
    
    
    20California
    
    
    27Colorado
    
    
    9Delaware
    
    
    1Florida
    
    
    11Georgia
    
    
    14Illinois
    
    
    30Indiana
    
    
    4Iowa
    
    
    2Kansas
    
    
    1Kentucky
    
    
    2Maryland
    
    
    4Massachusetts
    
    
    1Michigan
    
    
    5Minnesota
    
    
    6Nevada
    
    
    5New Jersey
    
    
    9New York
    
    
    8North Carolina
    
    
    9Ohio
    
    
    2Oklahoma
    
    
    5Oregon
    
    
    3Pennsylvania
    
    
    13South Carolina
    
    
    3Tennessee
    
    
    2Texas
    
    
    29Virginia
    
    
    7Washington
    
    
    3Wisconsin
    
    
    1Total
    
    
    237
    Reverse stock split
  10




---



##### 



Initial Public Offering
  2. Summary of significant accounting policies
  Fiscal quarter
  Derivative financial instruments
  Share-based compensation
 Share-Based Payment
 Accounting for Stock issued to Employees
 Share-Based Payment
 11




---



##### 



Nine months endedNovember 3,
    
    October 28,2007
    
    2006Volatility rate
    
    
    34% - 45%
    
    
    
    45%Risk-free interest rate
    
    
    4.54% - 5.05%
    
    
    
    4.69% - 5.05%Average expected life (years)
    
    
    4.9
    
    
    
    4.1Dividend yield
    
    None
    
    None
    Income taxes
 Accounting for Uncertainty in Income Taxes,
 Comprehensive income
  Three months ended
    
    Nine months endedNovember 3,
    
    October 28,
    
    November 3,
    
    October 28,(Dollars in thousands)
    
    2007
    
    2006
    
    2007
    
    2006Net income
    
    $
    4,206
    
    
    $
    3,617
    
    
    $
    11,731
    
    
    $
    12,881Unrealized (loss) gain on interest
rate swap hedge, net of income tax
    
    
    (209
    )
    
    
    (9
    )
    
    
    (304
    )
    
    
    54Comprehensive income
    
    $
    3,997
    
    
    $
    3,608
    
    
    $
    11,427
    
    
    $
    12,935
 Recent accounting pronouncements
 Fair Value Measurements
 12




---



##### 



The Fair Value Option for Financial Assets and
Financial Liabilities
 3. Commitments and contingencies
 Leases 
  Litigation 
 4. Notes payable
     13




---



##### 



5. Net income per common share
  Three months ended
    
    Nine months endedNovember 3,
    
    October 28,
    
    November 3,
    
    October 28,(In thousands, except per share data)
    
    2007
    
    2006
    
    2007
    
    2006Numerator for diluted net income per share  net
income
    
    $
    4,206
    
    
    $
    3,617
    
    
    $
    11,731
    
    
    $
    12,881Less preferred stock dividends
    
    
    3,598
    
    
    
    3,608
    
    
    
    11,219
    
    
    
    10,579Numerator for basic net income per share
    
    $
    608
    
    
    $
    9
    
    
    $
    512
    
    
    $
    2,302Denominator for basic net income per share
weighted-average common shares
    
    
    10,179
    
    
    
    6,652
    
    
    
    8,252
    
    
    
    5,422Dilutive effect of stock options and non-vested stock
    
    
    2,297
    
    
    
    1,702
    
    
    
    2,195
    
    
    
    2,109Dilutive effect of convertible preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41,752Denominator for diluted net income per share
    
    
    12,476
    
    
    
    8,354
    
    
    
    10,447
    
    
    
    49,283Net income common per share:Basic
    
    $
    0.06
    
    
    $
    0.00
    
    
    $
    0.06
    
    
    $
    0.42Diluted
    
    $
    0.05
    
    
    $
    0.00
    
    
    $
    0.05
    
    
    $
    0.26
  6. Related-party transactions
   
 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 that
involve risks and uncertainties. Our actual results could differ materially from those anticipated
in these forward-looking statements as a result of various factors, including those discussed in
the section entitled Risk Factors in this Form 10-Q.
 Forward-looking statements are based on our expectations regarding net sales, selling, general and
administrative expenses, profitability, financial position, business strategy, new store openings,
and plans and objectives of management. The words believe, may, will, estimate, continue,
anticipate, intend, expect and similar expressions, as they relate to us and our business,
industry, markets and consumers, are intended to identify forward-looking statements. We have based
these forward-looking statements largely on our current expectations and projections about future
events and financial trends that we believe may affect our financial condition, results of
operations, business strategy and financial needs. These forward-looking statements are subject to
a number of risks, uncertainties and assumptions, including, among others, those described in Risk
Factors and elsewhere in this quarterly report. New risk factors emerge from time to time and it
is not possible for our management to predict all risk factors, nor can we assess the impact of all
factors on our business or the extent to which any factor, or combination of factors, may cause
actual results to differ materially from those contained in any forward-looking statements. 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;
    
    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.
  16




---



##### 




    
    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 3,
    
    October 28,
    
    November 3,
    
    October 28,(Dollars in thousands)
    
    2007
    
    2006
    
    2007
    
    2006Net sales
    
    $
    208,235
    
    
    $
    166,075
    
    
    $
    602,797
    
    
    $
    488,101Cost of sales
    
    
    140,156
    
    
    
    115,332
    
    
    
    416,173
    
    
    
    337,238Gross profit
    
    
    68,079
    
    
    
    50,743
    
    
    
    186,624
    
    
    
    150,863Selling, general and administrative expenses
    
    
    55,609
    
    
    
    40,797
    
    
    
    154,779
    
    
    
    121,718Pre-opening expenses
    
    
    4,494
    
    
    
    2,901
    
    
    
    9,064
    
    
    
    5,328Operating income
    
    
    7,976
    
    
    
    7,045
    
    
    
    22,781
    
    
    
    23,817Interest expense
    
    
    1,307
    
    
    
    1,031
    
    
    
    3,465
    
    
    
    2,488Income before income taxes
    
    
    6,669
    
    
    
    6,014
    
    
    
    19,316
    
    
    
    21,329Income tax expense
    
    
    2,463
    
    
    
    2,397
    
    
    
    7,585
    
    
    
    8,448Net income
    
    $
    4,206
    
    
    $
    3,617
    
    
    $
    11,731
    
    
    $
    12,881Other operating data:Number stores end of period
    
    
    237
    
    
    
    188
    
    
    
    237
    
    
    
    188Comparable store sales increase
    
    
    6.7
    %
    
    
    16.8
    %
    
    
    7.4
    %
    
    
    14.2
    %
 Three months ended
    
    Nine months endedNovember 3,
    
    October 28,
    
    November 3,
    
    October 28,(Percentage of net sales)
    
    2007
    
    2006
    
    2007
    
    2006Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    67.3
    %
    
    
    69.4
    %
    
    
    69.0
    %
    
    
    69.1
    %Gross profit
    
    
    32.7
    %
    
    
    30.6
    %
    
    
    31.0
    %
    
    
    30.9
    %Selling,
general and administrative expenses
    
    
    26.7
    %
    
    
    24.6
    %
    
    
    25.7
    %
    
    
    24.9
    %Pre-opening expenses
    
    
    2.2
    %
    
    
    1.7
    %
    
    
    1.5
    %
    
    
    1.1
    %Operating income
    
    
    3.8
    %
    
    
    4.2
    %
    
    
    3.8
    %
    
    
    4.9
    %Interest expense
    
    
    0.6
    %
    
    
    0.6
    %
    
    
    0.6
    %
    
    
    0.5
    %Income before income taxes
    
    
    3.2
    %
    
    
    3.6
    %
    
    
    3.2
    %
    
    
    4.4
    %Income tax expense
    
    
    1.2
    %
    
    
    1.4
    %
    
    
    1.3
    %
    
    
    1.7
    %Net income
    
    
    2.0
    %
    
    
    2.2
    %
    
    
    1.9
    %
    
    
    2.6
    %
 18




---



##### 



Comparison of three months ended November 3, 2007 to three months ended October 28, 2006
 Net sales
  Gross profit
    Selling, general and administrative expenses
 rd
 Pre-opening expenses
  Interest expense
  Income tax expense
  19




---



##### 



Net income
  Comparison of nine months ended November 3, 2007 to nine months ended October 28, 2006
  Gross profit
    Selling, general and administrative expenses
  Pre-opening expenses
  Interest expense
  20




---



##### 



Income tax expense
  Net income
  Liquidity and capital resources
    rd
   21




---



##### 



Credit facility
    Operating activities
  Nine months endedNovember 3,
    
    October 28,(Dollars in thousands)
    
    2007
    
    2006Net income
    
    $
    11,731
    
    
    $
    12,881Items not affecting cash:Depreciation and amoritzation
    
    
    28,597
    
    
    
    20,159Deferred income taxes
    
    
    
    
    
    
    (2,694
    )Non-cash stock compensation charges
    
    
    1,635
    
    
    
    684Excess tax benefits from stock-based compensation
    
    
    (1,542
    )
    
    
    (2,818
    )(Gain) loss on disposal of property and equipment
    
    
    (11
    )
    
    
    1,827Changes in working capital items
    
    
    (43,288
    )
    
    
    (18,281
    )Net cash (used in) provided by operations
    
    $
    (2,878
    )
    
    $
    11,758
  Investing activities
  22




---



##### 



Nine months endedNovember 3,
    
    October 28,(Dollars in thousands)
    
    2007
    
    2006Purchases of property and equipment, net
    
    $
    (74,648
    )
    
    $
    (38,246
    )Receipt of related party notes receivable
    
    
    4,467
    
    
    
    Issuance of related party notes receivable
    
    
    
    
    
    
    (2,414
    )Net cash used in investing activities
    
    $
    (70,181
    )
    
    $
    (40,660
    )
  Financing activities
  Nine months endedNovember 3,
    
    October 28,(Dollars in thousands)
    
    2007
    
    2006Proceeds on long-term borrowings
    
    $
    750,262
    
    
    $
    551,928Payments on long-term borrowings
    
    
    (703,999
    )
    
    
    (525,997
    )Proceeds
from common stock in initial public offering, public offering, net of issuance costs
    
    
    123,921
    
    
    
    Payment of accumulated dividends in arrears
    
    
    (93,012
    )
    
    
    Redemption of Series III preferred stock
    
    
    (4,792
    )
    
    
    Purchase of treasury stock
    
    
    (1,949
    )
    
    
    Excess tax benefits from stock-based compensation
    
    
    1,542
    
    
    
    2,818Proceeds from issuance of common stock under
stock plans
    
    
    953
    
    
    
    535Net cash provided by financing activities
    
    $
    72,926
    
    
    $
    29,284
  Contractual obligations
   23




---



##### 



Off-balance sheet arrangements
  Critical accounting policies and estimates
  Share-based compensation
 Share-Based Payment
 Accounting for
Stock issued to Employees
 Share-Based Payment,
  Recent accounting pronouncements
 Accounting for Uncertainty in Income
Taxesan Interpretation of FASB Statement No. 109
 Fair Value Measurements
 The Fair Value Option for Financial Assets and
Financial Liabilities
 24




---



##### 



Item 3. Quantitative and Qualitative Disclosures about Market Risk
  Interest rate sensitivity
  
 Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control
 25




---



##### 



Part II   Other Information
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  We may be unable to compete effectively in our highly competitive markets.
  If we are unable to gauge beauty trends and react to changing consumer preferences in a timely
manner, our sales will decrease.
  
    
    recognize and define product and beauty trends;
    
    anticipate, gauge and react to changing consumer demands in a timely manner;
    
    translate market trends into appropriate, saleable product and service offerings in our
stores and salons in advance of our competitors;
    
    develop and maintain vendor relationships that provide us access to the newest
merchandise on reasonable terms; and
    
    distribute merchandise to our stores in an efficient and effective manner and maintain
appropriate in-stock levels.
  If we fail to retain our existing senior management team and continue to attract qualified new
personnel, such failure could have a material adverse effect on our business, financial condition
and results of operations.
  26




---



##### 



We intend to continue to open new stores, which could strain our resources and have a material
adverse effect on our business and financial performance.
  The capacity of our distribution and order fulfillment infrastructure may not be adequate to
support our recent growth and expected future growth plans, which could prevent the successful
implementation of these plans or cause us to incur costs to expand this infrastructure, which could
have a material adverse effect on our business, financial condition and results of operations.
  Any significant interruption in the operations of our single distribution facility could disrupt
our ability to deliver merchandise to our stores in a timely manner, which could have a material
adverse effect on our business, financial condition and results of operations.
  Any material disruption of our information systems could negatively impact financial results and
materially adversely affect our business operations.
  27




---



##### 



A downturn in the economy may affect consumer purchases of discretionary items such as prestige
beauty products and premium salon services, which could delay our growth strategy and have a
material adverse effect on our business, financial condition, profitability and cash flows.
  Increased costs or interruption in our third-party vendors overseas sourcing operations could
disrupt production, shipment or receipt of some of our merchandise, which would result in lost
sales and could increase our costs.
   A reduction in traffic to, or the closing of, the other destination retailers in the shopping areas
where our stores are located could significantly reduce our sales and leave us with unsold
inventory, which could have a material adverse effect on our business, financial condition and
results of operations.
 28




---



##### 



Diversion of exclusive salon products, or a decision by manufacturers of exclusive salon products
to utilize other distribution channels, could negatively impact our revenue from the sale of such
products, which could have a material adverse effect on our business, financial condition and
results of operations.
  We rely on our good relationships with vendors to purchase prestige, mass and salon beauty products
on reasonable terms. If these relationships were to be impaired, or if certain vendors were unable
to supply sufficient merchandise to keep pace with our growth plans, we may not be able to obtain a
sufficient selection or volume of merchandise on reasonable terms, and we may not be able to
respond promptly to changing trends in beauty products, either of which could have a material
adverse effect on our competitive position, our business and financial performance.
   If we are unable to protect our intellectual property rights, our brand and reputation could be
harmed, which could have a material adverse effect on our business, financial condition and results
of operations.
  29




---



##### 



If our manufacturers are unable to produce products manufactured uniquely for ULTA, including ULTA
branded products and gift-with-purchase and other promotional products, consistent with applicable
regulatory requirements, we could suffer lost sales and be required to take costly corrective
action, which could have a material adverse effect on our business, financial condition and results
of operations.
  We, as well as our vendors, are subject to laws and regulations that could require us to modify our
current business practices and incur increased costs, which could have a material adverse effect on
our business, financial condition and results of operations.
  
    
    Our rapidly expanding workforce, growing in pace with our number of stores, makes us
vulnerable to changes in labor and employment laws. In addition, changes in federal and
state minimum wage laws and other laws relating to employee benefits could cause us to
incur additional wage and benefits costs, which could hurt our profitability and affect our
growth strategy.
    
    Our salon business is subject to state board regulations and state licensing
requirements for our stylists and our salon procedures. Failure to maintain compliance with
these regulatory and licensing requirements could jeopardize the viability of our salons.
    
    We operate stores in California, which has enacted legislation commonly referred to as
Proposition 65 requiring that clear and reasonable warnings be given to consumers who
are exposed to chemicals known to the State of California to cause cancer or reproductive
toxicity. Although we have sought to comply with Proposition 65 requirements, there can be
no assurance that we will not be adversely affected by litigation relating to Proposition
65.
  As we grow the number of our stores in new cities and states, we are subject to local building
codes in an increasing number of local jurisdictions. Our failure to comply with local building
codes, and the failure of our landlords to obtain certificates of occupancy in a timely manner,
could cause delays in our new store openings, which could increase our store opening costs, cause
us to incur lost sales and profits, and damage our public reputation.
 30




---



##### 



Our ULTA products and salon services may cause unexpected and undesirable side effects that could
result in their discontinuance or expose us to lawsuits, either of which could result in unexpected
costs and damage to our reputation, which could have a material adverse effect on our business,
financial condition and results of operations.
  Legal proceedings or third-party claims of intellectual property infringement may require us to
spend time and money and could prevent us from developing certain aspects of our business
operations, which could have a material adverse effect on our business, financial condition and
results of operations.
    31




---



##### 



Increases in the demand for, or the price of, raw materials used to build and remodel our stores
could hurt our profitability.
  Increases in costs of mailing, paper and printing will affect the cost of our catalog and
promotional mailings, which will reduce our profitability.
  Our secured revolving credit facility contains certain restrictive covenants that could limit our
operational flexibility, including our ability to open stores.
  We will need to raise additional funds to pursue our growth strategy or continue our operations,
and we may be unable to raise capital when needed, which could have a material adverse effect on
our business, financial condition and results of operations.
  Failure to maintain adequate financial and management processes and controls could lead to errors
in our financial reporting and could harm our ability to manage our expenses.
  32




---



##### 



The market price for our common stock may be volatile, and you may not be able to sell our stock at
a favorable price or at all.
  
    
    differences between our actual financial and operating results and those expected by
investors;
    
    fluctuations in quarterly operating results;
    
    our performance during peak retail seasons such as the holiday season;
    
    market conditions in our industry and the economy as a whole;
    
    changes in the estimates of our operating performance or changes in recommendations by
any research analysts that follow our stock or any failure to meet the estimates made by
research analysts;
    
    investors perceptions of our prospects and the prospects of the beauty products and
salon services industries;
    
    the performance of our key vendors;
    
    announcements by us, our vendors or our competitors of significant acquisitions,
divestitures, strategic partnerships, joint ventures or capital commitments;
    
    introductions of new products or new pricing policies by us or by our competitors;
    
    recruitment or departure of key personnel; and
    
    the level and quality of securities research analyst coverage for our common stock.
  Our comparable store sales and quarterly financial performance may fluctuate for a variety of
reasons, which could result in a decline in the price of our common stock.
  
    
    changes in our merchandising strategy or mix;
    
    performance of our new and remodeled stores;
    
    the effectiveness of our inventory management;
    
    timing and concentration of new store openings, including additional human resource
requirements and related pre-opening and other start-up costs;
    
    cannibalization of existing store sales by new store openings;
    
    levels of pre-opening expenses associated with new stores;
    
    timing and effectiveness of our marketing activities, such as catalogs and newspaper
inserts;
    
    seasonal fluctuations due to weather conditions;
    
    actions by our existing or new competitors; and
    
    general U.S. economic conditions and, in particular, the retail sales environment.
  33




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A significant amount of our total outstanding shares are restricted from immediate resale, but may
be sold into the market in the near future. The large number of shares eligible for public sale or
subject to rights requiring us to register them for public sale could depress the market price of
our common stock.
   Our current principal stockholders will continue to have significant influence over us after this
offering, and they could delay, deter, or prevent a change of control or other business combination
or otherwise cause us to take action with which you might not agree.
  Anti-takeover provisions in our organizational documents, stockholder rights agreement and Delaware
law may discourage or prevent a change in control, even if a sale of the company would be
beneficial to our stockholders, which could cause our stock price to decline and prevent attempts
by our stockholders to replace or remove our current management.
  
    
    dividing our board of directors into three classes serving staggered three-year terms;
    
    authorizing our board of directors to issue preferred stock and additional shares of our
common stock without stockholder approval;
    
    prohibiting stockholder actions by written consent;
    
    prohibiting our stockholders from calling a special meeting of stockholders;
    
    prohibiting our stockholders from making certain changes to our amended and restated
certificate of incorporation or amended and restated bylaws except with 662/3% stockholder approval; and
    
    requiring advance notice for raising business matters or nominating directors at
stockholders meetings.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 Sales of Unregistered Securities
  Use of Proceeds from Public Offering
   
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
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Item 5. Other Information
  
 Item 6. Exhibits
 Exhibit number
    
    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).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.
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SIGNATURES
   By:
    
    /s/ Lynelle P. Kirby

Lynelle P. KirbyPresident, Chief Executive Officer and DirectorBy:
    
    /s/ Gregg R. Bodnar

Gregg R. BodnarChief Financial Officer
 37