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ULTA SALON, COSMETICS & FRAGRANCE, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes included elsewhere in this quarterly report. This discussion contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, which reflect our current views with respect to, among other things, future events and financial performance. You can identify these forward-looking statements by the use of forward-looking words such as "outlook," "believes," "expects," "plans," "estimates," "targets," or other comparable words. Any forward-looking statements contained in this Form 10-Q are based upon our historical performance and on current plans, estimates and expectations. The inclusion of this forward-looking information should not be regarded as a representation by us or any other person that the future plans, estimates, targets 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 and existing locations 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; our ability to attract and retain key executive personnel; our ability to successfully execute and implement our common stock repurchase program; our ability to sustain our growth plans and successfully implement our long-range strategic and financial plan; and other risk factors detailed in our public filings with the Securities and Exchange Commission (the "SEC"), including risk factors contained in Item 1A, "Risk Factors" of our Annual Report on Form 10-K for the year ended February 1, 2014. 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. and its consolidated subsidiary, Ulta Inc. unless otherwise expressly stated or the context otherwise requires. Overview We were founded in 1990 as a beauty retailer at a time when prestige, mass and salon products were sold through distinct channels - department stores for prestige products, drug stores and mass merchandisers for mass products, and salons and authorized retail outlets for professional hair care products. We developed a unique specialty retail concept by combining one-stop shopping, a compelling value proposition, convenient locations and a welcoming shopping environment. We believe our strategy provides us with the competitive advantages that have contributed to our strong financial performance. We are currently the largest beauty retailer that provides one-stop shopping for prestige, mass and salon products and salon services in the United States. We focus on providing affordable indulgence to our customers by combining unmatched product breadth, value and convenience with the distinctive environment and experience of a specialty retailer. Key aspects of our business include our ability to offer our customers a broad selection of more than 20,000 beauty products across the categories of cosmetics, fragrance, haircare, skincare, bath and body products and salon styling tools, as well as salon haircare products. We focus on delivering a compelling value proposition to our customers across all of our product categories. Our stores are predominately located in convenient, high-traffic locations such as power centers. As of August 2, 2014, we operated 715 stores across 47 states. The continued growth of our business and any future increases in net sales, net income and cash flows is dependent on our ability to execute our six strategic imperatives: 1) acquire new guests and deepen loyalty with existing guests, 2) differentiate by delivering a distinctive and personalized guest experience across all channels, 3) offer relevant, innovative, and often exclusive products that excite our guests, 4) deliver exceptional services in three core areas: hair, skin health, and brows, 5) grow stores and e-commerce to reach and serve more guests, and 6) invest in infrastructure to support our guest experience and growth, and capture scale efficiencies. We believe that the expanding U.S. beauty products and salon services industry, the shift in distribution of prestige beauty products from department stores to specialty retail stores, coupled with Ulta's competitive strengths, positions us to capture additional market share in the industry. Comparable store sales is a key metric that is monitored closely within the retail industry. Our comparable store sales have fluctuated in the past and we expect them to continue to fluctuate in the future. A variety of factors affect our comparable store sales, including general U.S. economic conditions, changes in merchandise strategy or mix, and timing and effectiveness of our marketing activities, among others. Over the long-term, our growth strategy is to increase total net sales through increases in our comparable store sales, and by opening new stores, and by increasing sales in our e-commerce channel. Operating profit is expected to increase as a result of our ability to expand merchandise margin and leverage our fixed store costs with comparable store sales increases and operating efficiencies offset by incremental investments in people, systems and supply chain required to support a 1,200 store chain with a successful e-commerce business and competitive omni-channel capabilities. 10-------------------------------------------------------------------------------- Table of Contents Basis of presentation We have determined the operating segments on the same basis that we use to internally evaluate performance. We have combined our three operating segments: retail stores, salon services and e-commerce, into one reportable segment because they have a similar class of consumer, economic characteristics, nature of products and distribution methods. Net sales include store and e-commerce merchandise sales as well as salon service revenue. We recognize merchandise revenue at the point of sale in our retail stores and e-commerce sales are recorded based on delivery of merchandise to the customer. Merchandise sales are recorded net of estimated returns. Salon service revenue is recognized at the time the service is provided. Gift card sales revenue is deferred until the customer redeems the gift card. Company coupons and other incentives are recorded as a reduction of net sales. Comparable store sales reflect sales for stores beginning on the first day of the 14th month of operation. Therefore, a store is included in our comparable store base on the first day of the period after one year of operations plus the initial one month grand opening period. Non-comparable store sales include sales from new stores that have not yet completed their 13th month of operation and stores that were closed for part or all of the period in either year as a result of remodel activity. Remodeled stores are included in comparable store sales unless the store was closed for a portion of the current or prior period. Comparable store sales include the Company's e-commerce business. There may be variations in the way in which some of our competitors and other retailers calculate comparable or same store sales. Measuring comparable store sales allows us to evaluate the performance of our store base as well as several other aspects of our overall strategy. Several factors could positively or negatively impact our comparable store sales results: • the general national, regional and local economic conditions and corresponding impact on consumer spending levels; • the introduction of new products or brands; • the location of new stores in existing store markets; • competition; • our ability to respond on a timely basis to changes in consumer preferences; • the effectiveness of our various marketing activities; and • the number of new stores opened and the impact on the average age of all of our comparable stores. Cost of sales includes: • the cost of merchandise sold, including substantially all vendor allowances, which are treated as a reduction of merchandise costs; • 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; • customer loyalty program expense; and • shrink and inventory valuation reserves. 11 -------------------------------------------------------------------------------- Table of Contents Our cost of sales may be negatively impacted as we open an increasing number of stores. Changes in our merchandise mix may also have an impact on cost of sales. This presentation of items included in cost of sales may not be comparable to the way in which our competitors or other retailers compute their cost of sales. Selling, general and administrative expenses include: • payroll, bonus and benefit costs for retail and corporate employees; • advertising and marketing costs; • occupancy costs related to our corporate office facilities; • stock-based compensation expense; • depreciation and amortization for all assets except those related to our retail and warehouse operations, which are included in cost of sales; and • legal, finance, information systems and other corporate overhead costs. This presentation of items in selling, general and administrative expenses may not be comparable to the way in which our competitors or other retailers compute their selling, general and administrative expenses. Pre-opening expense includes non-capital expenditures during the period prior to store opening for new, remodeled and relocated stores including rent during the construction period for new and relocated stores, store set-up labor, management and employee training and grand opening advertising. Interest expense includes unused facility fees associated with our credit facility, which is structured as an asset-based lending instrument. Our credit facility interest is based on a variable interest rate structure which can result in increased cost in periods of rising interest rates. Income tax expense reflects the federal statutory tax rate and the weighted average state statutory tax rate for the states in which we operate stores. 12-------------------------------------------------------------------------------- Table of Contents Results of operations Our quarterly periods are the 13 weeks ending on the Saturday closest to April 30, July 31, October 31 and January 31. The Company's second quarters in fiscal 2014 and 2013 ended on August 2, 2014 and August 3, 2013, respectively. Our quarterly results of operations have varied in the past and are likely to do so again in the future. As such, we believe that period-to-period comparisons of our results of operations should not be relied upon as an indication of our future performance. The following table presents the components of our consolidated results of operations for the periods indicated: 13 Weeks Ended 26 Weeks Ended August 2, August 3, August 2, August 3, (Dollars in thousands) 2014 2013 2014 2013 Net sales $ 734,236 $ 600,998 $ 1,448,006 $ 1,183,710 Cost of sales 474,894 388,921 942,711 767,684 Gross profit 259,342 212,077 505,295 416,026 Selling, general and administrative expenses 157,768 134,400 320,211 267,448 Pre-opening expenses 3,595 4,809 6,224 8,015 Operating income 97,979 72,868 178,860 140,563 Interest income, net (209 ) (18 ) (409 ) (42 ) Income before income taxes 98,188 72,886 179,269 140,605 Income tax expense 37,394 27,975 68,522 53,868 Net income $ 60,794 $ 44,911 $ 110,747 $ 86,737 Other operating data: Number of stores end of period 715 609 715 609 Comparable store sales: Retail and salon comparable store sales 8.3 % 7.1 % 7.6 % 6.2 % E-commerce comparable store sales 54.9 % 72.1 % 63.8 % 70.8 % Total comparable store sales increase 9.6 % 8.4 % 9.2 % 7.6 % 13 Weeks Ended 26 Weeks Ended August 2, August 3, August 2, August 3, (Percentage of net sales) 2014 2013 2014 2013 Net sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales 64.7 % 64.7 % 65.1 % 64.9 % Gross profit 35.3 % 35.3 % 34.9 % 35.1 % Selling, general and administrative expenses 21.5 % 22.4 % 22.1 % 22.6 % Pre-opening expenses 0.5 % 0.8 % 0.4 % 0.7 % Operating income 13.3 % 12.1 % 12.4 % 11.9 % Interest income, net 0.0 % 0.0 % 0.0 % 0.0 % Income before income taxes 13.4 % 12.1 % 12.4 % 11.9 % Income tax expense 5.1 % 4.7 % 4.7 % 4.6 % Net income 8.3 % 7.5 % 7.6 % 7.3 % 13 -------------------------------------------------------------------------------- Table of Contents Comparison of 13 weeks ended August 2, 2014 to 13 weeks ended August 3, 2013 Net sales Net sales increased $133.2 million or 22.2%, to $734.2 million for the 13 weeks ended August 2, 2014, compared to $601.0 million for the 13 weeks ended August 3, 2013. Salon service sales increased $7.1 million or 19.7%, to $43.1 million compared to $36.0 million in second quarter 2013. E-commerce sales increased $9.0 million or 54.9%, to $25.2 million compared to $16.2 million in second quarter 2013. The net sales increases are due to comparable stores driving an increase of $56.7 million and non-comparable store increases of $76.5 million compared to the second quarter 2013. The 9.6% comparable store sales increase consisted of an 8.3% increase at the Company's retail and salon stores and a 54.9% increase in the Company's e-commerce business. The inclusion of the e-commerce business resulted in an increase of approximately 130 basis points to the Company's consolidated same store sales calculation for the 13 weeks ended August 2, 2014 and August 3, 2013. The total comparable store sales increase included a 5.8% increase in traffic and a 3.8% increase in average ticket. We attribute the increase in comparable store sales to our successful marketing and merchandising strategies. Gross profit Gross profit increased $47.2 million or 22.3%, to $259.3 million for the 13 weeks ended August 2, 2014, compared to $212.1 million for the 13 weeks ended August 3, 2013. Gross profit as a percentage of net sales was 35.3% for the 13 weeks ended August 2, 2014, and August 3, 2013. The changes in gross profit margin were primarily driven by: • 10 basis points of leverage in fixed store costs attributed to the impact of higher sales volume; offset by • 10 basis points of deleverage in supply chain due to the expansion of e-commerce fulfillment at the Chambersburg, PA distribution center. Selling, general and administrative expenses Selling, general and administrative (SG&A) expenses increased $23.4 million or 17.4%, to $157.8 million for the 13 weeks ended August 2, 2014, compared to $134.4 million for the 13 weeks ended August 3, 2013. As a percentage of net sales, SG&A expenses decreased 90 basis points to 21.5% for the 13 weeks ended August 2, 2014, compared to 22.4% for the 13 weeks ended August 3, 2013. The leverage in SG&A expenses is primarily driven by: • 80 basis points improvement in variable store and marketing expense leverage attributed to cost efficiencies and higher sales volume; and • 10 basis points in corporate overhead leverage attributed to higher sales volume. Pre-opening expenses Pre-opening expenses decreased $1.2 million to $3.6 million for the 13 weeks ended August 2, 2014, compared to $4.8 million for the 13 weeks ended August 3, 2013. During the 13 weeks ended August 2, 2014, we opened 19 new stores and remodeled 4 stores, compared to 33 new store openings, 1 relocated store and 1 remodeled store during the 13 weeks ended August 3, 2013. Interest income and expense Interest income and expense was insignificant for the 13 weeks ended August 2, 2014 and August 3, 2013. Interest income for the period represents income from short-term investments with maturities of twelve months or less from the date of purchase. Interest expense for the period represents various unused credit facility fees. We did not access our credit facility during the second quarter of fiscal 2014 or 2013. Income tax expense Income tax expense of $37.4 million for the 13 weeks ended August 2, 2014 represents an effective tax rate of 38.1%, compared to $28.0 million of tax expense representing an effective tax rate of 38.4% for the 13 weeks ended August 3, 2013. The lower tax rate is primarily due to a decrease in book expense on incentive stock options and additional state credits available in the current year. 14 -------------------------------------------------------------------------------- Table of Contents Net income Net income increased $15.9 million or 35.4%, to $60.8 million for the 13 weeks ended August 2, 2014, compared to $44.9 million for the 13 weeks ended August 3, 2013. The increase is primarily related to the $47.2 million increase in gross profit, offset by a $23.4 million increase in SG&A expenses and a $9.4 million increase in income tax expense. Comparison of 26 weeks ended August 2, 2014 to 26 weeks ended August 3, 2013 Net sales Net sales increased $264.3 million or 22.3%, to $1,448.0 million for the 26 weeks ended August 2, 2014, compared to $1,183.7 million for the 26 weeks ended August 3, 2013. Salon service sales increased $14.4 million or 20.1%, to $85.7 million compared to $71.3 million in the first 26 weeks of fiscal 2013. E-commerce sales increased $21.2 million or 63.8%, to $54.5 million compared to $33.3 million in the first 26 weeks of fiscal 2013. The net sales increases are due to comparable stores driving an increase of $106.6 million and non-comparable store increases of $157.7 million compared to the first 26 weeks of fiscal 2013. The 9.2% comparable store sales increase consisted of a 7.6% increase at the Company's retail and salon stores and a 63.8% increase in the Company's e-commerce business. The inclusion of the e-commerce business resulted in an increase of approximately 160 basis points to the Company's consolidated same store sales calculation for the 26 weeks ended August 2, 2014 compared to 140 basis points for the 26 weeks ended August 3, 2013. The total comparable store sales increase included a 4.2% increase in traffic and a 5.0% increase in average ticket. We attribute the increase in comparable store sales to our successful marketing and merchandising strategies. Gross profit Gross profit increased $89.3 million or 21.5%, to $505.3 million for the 26 weeks ended August 2, 2014, compared to $416.0 million for the 26 weeks ended August 3, 2013. Gross profit as a percentage of net sales decreased 20 basis points to 34.9% for the 26 weeks ended August 2, 2014, compared to 35.1% for the 26 weeks ended August 3, 2013. The decrease in gross profit margin was primarily driven by 20 basis points of deleverage in merchandise margins driven primarily by product and channel mix shifts and converting the remaining 50% of our loyalty program members to the ULTAmate rewards loyalty program. Selling, general and administrative expenses Selling, general and administrative (SG&A) expenses increased $52.8 million or 19.7%, to $320.2 million for the 26 weeks ended August 2, 2014, compared to $267.4 million for the 26 weeks ended August 3, 2013. As a percentage of net sales, SG&A expenses decreased 50 basis points to 22.1% for the 26 weeks ended August 2, 2014, compared to 22.6% for the 26 weeks ended August 3, 2013. The leverage in SG&A expenses is primarily attributed to 50 basis points in variable store and marketing expense leverage attributed to cost efficiencies and higher sales volume. Pre-opening expenses Pre-opening expenses decreased $1.8 million to $6.2 million for the 26 weeks ended August 2, 2014, compared to $8.0 million for the 26 weeks ended August 3, 2013. During the 26 weeks ended August 2, 2014, we opened 40 new stores and remodeled 4 stores, compared to 61 new store openings, 1 relocated store and 1 remodeled store during the 26 weeks ended August 3, 2013. Interest income and expense Interest income and expense was insignificant for the 26 weeks ended August 2, 2014 and August 3, 2013. Interest income for the period represents income from short-term investments with maturities of twelve months or less from the date of purchase. Interest expense for the period represents various unused credit facility fees. We did not access our credit facility during the second quarter of fiscal 2014 or 2013. Income tax expense Income tax expense of $68.5 million for the 26 weeks ended August 2, 2014 represents an effective tax rate of 38.2%, compared to $53.9 million of tax expense representing an effective tax rate of 38.3% for the 26 weeks ended August 3, 2013. The lower tax rate is primarily due to additional state credits available in the current year. 15-------------------------------------------------------------------------------- Table of Contents Net income Net income increased $24.0 million or 27.7%, to $110.7 million for the 26 weeks ended August 2, 2014, compared to $86.7 million for the 26 weeks ended August 3, 2013. The increase is primarily related to the $89.3 million increase in gross profit, offset by a $52.8 million increase in SG&A expenses and a $14.6 million increase in income tax expense. Liquidity and capital resources Our primary cash needs are for capital expenditures for new, relocated and remodeled stores, increased merchandise inventories related to store expansion, supply chain improvements, share repurchases and for continued improvement in our information technology systems. Our primary sources of liquidity are cash on hand and cash flows from operations, including changes in working capital and borrowings under our credit facility. The most significant component of our working capital is merchandise inventories reduced by related accounts payable and accrued expenses. Our working capital position benefits from the fact that we generally collect cash from sales to customers the same day or within several days of the related sale, while we typically have up to 30 days to pay our vendors. Our working capital needs are greatest from August through November each year as a result of our inventory build-up during this period for the approaching holiday season. This is also the time of year when we are at maximum investment levels in our new store class and may not have collected all of the landlord allowances due to us as part of our lease agreements. Based on past performance and current expectations, we believe that cash on hand, cash generated from operations and borrowings under the credit facility will satisfy the Company's working capital needs, capital expenditure needs, commitments, and other liquidity requirements through at least the next 12 months. The following table presents a summary of our cash flows for the periods indicated: 26 Weeks Ended August 2, August 3, (In thousands) 2014 2013 Net cash provided by operating activities $ 133,228 $ 84,520 Net cash used in investing activities (194,243 ) (98,029 ) Net cash provided by (used in) financing activities 4,597 (20,756 ) Net decrease in cash and cash equivalents $ (56,418 ) $ (34,265 ) Operating activities Operating activities consist of net income adjusted for certain non-cash items, including depreciation and amortization, non-cash stock-based compensation, realized gains or losses on disposal of property and equipment, and the effect of working capital changes. Merchandise inventories were $541.5 million at August 2, 2014, compared to $461.2 million at August 3, 2013, representing an increase of $80.3 million. Average inventory per store was flat compared to prior year and the increase in inventory is primarily due to the addition of 106 net new stores opened since August 3, 2013. Deferred rent liabilities were $281.3 million at August 2, 2014, an increase of $42.1 million compared to August 3, 2013. Deferred rent includes deferred construction allowances, future rental increases and rent holidays, which are all recognized on a straight-line basis over their respective lease term. The increase is primarily due to the addition of 106 net new stores opened since August 3, 2013. Investing activities We have historically used cash primarily for new and remodeled stores, supply chain investments, short-term investments and investments in information technology systems. Investment activities related to capital expenditures were $94.1 million during the 26 weeks ended August 2, 2014, compared to $98.0 million during the 26 weeks ended August 3, 2013. The decrease in capital expenditures year over year is primarily due to the decrease in number of new store openings during fiscal 2014, partially offset by investments in supply chain initiatives. Purchases of short-term investments were $100.1 million during the 26 weeks ended August 2, 2014 and consist of certificates of deposit and time deposits with maturities of twelve months or less from the date of purchase. 16 -------------------------------------------------------------------------------- Table of Contents Financing activities Financing activities in fiscal 2014 consist principally of capital stock transactions and the related income tax effects and our stock repurchase program. Purchase of treasury shares in fiscal 2014 and 2013 represents the fair value of common shares repurchased from plan participants in connection with shares withheld to satisfy minimum statutory tax obligations upon the vesting of restricted stock. We had no borrowings outstanding under our credit facility as of August 2, 2014, February 1, 2014 or August 3, 2013. The zero outstanding borrowings position is due to a combination of factors including strong sales growth, overall performance of management initiatives including expense control and other working capital reductions. We may require borrowings under the credit facility from time to time in future periods to support our new store program and seasonal inventory needs. Share repurchase program On March 18, 2013, we announced that our Board of Directors had authorized a share repurchase program (the 2013 Share Repurchase Program) pursuant to which the Company may repurchase up to $150 million of the Company's common stock. The repurchases may be made from time to time in the open market, in privately negotiated transactions or otherwise, at prices that the Company deems appropriate and subject to market conditions, applicable law and other factors deemed relevant in the Company's sole discretion. The 2013 Share Repurchase Program does not have an expiration date and may be suspended or discontinued at any time. During the 26 weeks ended August 3, 2013, we purchased 500,500 shares of common stock for $37.3 million at an average price of $74.58. There were no repurchases during the 26 weeks ended August 2, 2014. On September 11, 2014, we announced that our Board of Directors authorized a new share repurchase program (the 2014 Share Repurchase Program) pursuant to which the Company may repurchase up to $300 million of the Company's common stock. The 2014 Share Repurchase Program authorization revokes the previously authorized but unused amounts of $112.7 million from the 2013 Share Repurchase Program. The Company's intention is to repurchase shares to offset equity dilution and to repurchase shares based on market conditions to return excess cash to shareholders. The 2014 Share Repurchase Program does not have an expiration date and may be suspended or discontinued at any time. Credit facility On October 19, 2011, the Company entered into an Amended and Restated Loan and Security Agreement (the Loan Agreement) with Wells Fargo Bank, National Association, as Administrative Agent, Collateral Agent and a Lender thereunder, Wells Fargo Capital Finance LLC as a Lender, J.P. Morgan Securities LLC as a Lender, JP Morgan Chase Bank, N.A. as a Lender and PNC Bank, National Association, as a Lender. The Loan Agreement amended and restated the Loan and Security Agreement, dated as of August 31, 2010, by and among the lenders. The Loan Agreement extended the maturity of the Company's credit facility to October 2016, provides maximum revolving loans equal to the lesser of $200,000 or a percentage of eligible owned inventory, contains a $10,000 subfacility for letters of credit and allows the Company to increase the revolving facility by an additional $50,000, subject to consent by each lender and other conditions. The Loan Agreement contains a requirement to maintain a minimum amount of excess borrowing availability at all times. On September 5, 2012, we entered into Amendment No. 1 to Amended and Restated Loan and Security Agreement (the First Amendment) with the lender group. The First Amendment updated certain administrative terms and conditions and provides us greater flexibility to take certain corporate actions. There were no changes to the revolving loan amounts available, interest rates, covenants or maturity date under terms of the Loan Agreement. On December 6, 2013, we entered into Amendment No. 2 to the Amended and Restated Loan and Security Agreement (the Second Amendment) with the lender group. The Second Amendment extended the maturity of the facility to December 2018. Substantially all of the Company's assets are pledged as collateral for outstanding borrowings under the facility. Outstanding borrowings will bear interest at the prime rate or Libor plus 1.50% and the unused line fee is 0.20%. As of August 2, 2014, February 1, 2014 and August 3, 2013, we had no borrowings outstanding under the credit facility and the Company was in compliance with all terms and covenants of the agreement. Off-balance sheet arrangements Our off-balance sheet arrangements consist of operating lease obligations. We do not have any non-cancelable purchase commitments as of August 2, 2014. 17-------------------------------------------------------------------------------- Table of Contents Contractual obligations Our contractual obligations consist of operating lease obligations and our revolving line of credit. No material changes outside the ordinary course of business have occurred in our contractual obligations during the 26 weeks ended August 2, 2014. Critical accounting policies and estimates Management's discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (GAAP). The preparation of these financial statements required the use of estimates and judgments that affect the reported amounts of our assets, liabilities, revenues and expenses. Management bases estimates on historical experience and other assumptions it believes to be reasonable under the circumstances and evaluates these estimates on an on-going basis. Actual results may differ from these estimates. There have been no significant changes to the critical accounting policies and estimates included in our Annual Report on Form 10-K for the fiscal year ended February 1, 2014. Recent accounting pronouncements In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers, issued as a new Topic, Accounting Standards Codification Topic 606. The new revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle is that we will recognize revenue when we transfer promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. This standard is effective beginning in fiscal year 2017 and allows for either full retrospective or modified retrospective adoption. We are currently evaluating the application method and the impact of this new standard on its consolidated financial position, results of operations, and cash flows. |