Essays Guru

ULTA Beauty LLC., Financial Analysis

Shalonda Cureton

UMUC, FINC 330, Spring 2019, OL Session 4

Background

ULTA Beauty is an organization that operates in the retail industry. The company deals in a range of products from cosmetics, the fragrance for both men and women, skincare brands, beauty tools, hair care and many other products. The company was founded in 1990 by George Richard under the name ULTA Salon, Cosmetics & Fragrance Inc. which was changed to ULTA Beauty Inc. in 2017. The organization has it is headquartered in Bolingbrook, Illinois. The report of 2018 shows that the firm has over 1,100 branches which are majorly located in the united states with a few others in other European nations. The company boast of over 24,000 employees across the over 1,100 branches that it operates around the globe. The quality products offered by the company is one of the strengths that has helped in attracting more customers despite the stiff competition from other firms in the US.

Common size analysis

Common size analysis is the examination of the changes in the balance sheet. The analysis examines the changes in the various items in the balance sheet about the total assets of the organization. The common size analysis helps the organization to study the changes in the value of assets of the organization from one period to another. Secondly, common size analysis helps the organization to determine the change in the value of the assets and the liabilities of the organization about the changes in its competitors’ assets and liabilities.

The cash and cash equivalent of the company has been on the decrease over the past three years. The cash percentage decreased from 21.33% in 2016 to 13.66% in 2018. The similar trend is witnessed in the change in the total current assets that have decreased from 61.64% in 2016 to 60.20% in 2017 and finally to 58.23% in 2018. It is worth noting that despite the decrease in the current assets it has remained above the current liabilities which shows that the organization can pay its current obligation when they become due. The non-current assets have however increased over the same period. The fixed assets have increased from 38.36% in 2016 to 41.77% in 2018 (ULTA Beauty Inc., 2019).

The total current liabilities have increased over the last three years. The value of the current liabilities was 17.76% of the total assets in 2016. The percentage increased to 20.74% in 2017 then, 22.08% in 2018. The liabilities of the firm are expected to increase so that the firm can generate more revenue from its operations. The long-term liabilities of the organization were lower than the current liabilities for the last three years. The non-current liabilities have had both upward and downward change in its percentages. The highest percentage was 18.51%% in 2017 which then decreased to 16.93% in 2018 which was the lowest within the three years covered (ULTA Beauty Inc., 2019).

Income statement analysis

The revenue of the organization has increased over the last five years covered in the assignment from 2014 to 2018. The constant increase in the revenue is an indication that the firm is growing, and it is becoming more efficient in the management of its resources. The revenue increased from 2.671 million dollars in 2014 to 5.885 million dollars in 2018. The increase in revenue shows a 120% increase within five years. The increase in the revenue of the company was also accompanied by an increase in the cost of production which rose from 1.729 million dollars in 2014 to 3.788 million dollars in 2018. The increase represents 1% increase in the cost of production which is like the increase in revenue. The similar increase between the cost of production and revenue generated a similar percentage increase in the gross profit from 0.941 million dollars in 2014 to 2.097 million dollars in 2018.

The total operating expenses of the organization also increased over the five years from 0.614 million dollars in 2014 to 1.312 million dollars in 2018 which is 114% increase. The increase in the total operating expenses is because of the stiff competition that forces the organization to use more resources to attract new customers and retain their old customers. The operating income of the company has consistently increased over the five years from 0.328 million dollars in 2014 to 0.785 million dollars in 2018 which is a 139% increase. The net income of the organization also increased from 0.203 million dollars in 2014 to 0.555 million dollars in 2018 which is 173% increase. The analysis shows that the profitability of the organization is on the right which is a piece of good news to the investors because of the assurance of the increase in their earnings from their investment in the firm. The management can also use the earned net income to expand the business.

Series 1 – 2014 Series 2 – 2015 Series 3 – 2016 Series 4 – 2017 Series 5 – 2018

Financial ratio analysis

The current ratio of the organization has been on the decrease an indication of the reduction in the ability of the organization to meet its current liabilities. The current ratio is, however, more than one unit which shows that the firm can pay all its current liabilities when they become due. The quick ratio of the organization decreased throughout the period but remained above one except 2018 when the value fell below one unit (Stent, Bradbury & Hooks, 2010). The organization could use its most current assets to meet its liabilities for the first three years. In 2018 the quick ratio was below one unit an indication that the firm had more liabilities than the most liquid assets. The negative working capital to asset ratio shows that the current assets for the period are more than the current liabilities. The company is viewed to be liquid over the four years.

Days of sales in inventory is the period it takes to convert the inventory of the organization into revenue. The days of sales of inventory increased in the first three years with a decrease in the last year. Increase in the days of sales of inventory shows that the firm is becoming inefficient in converting inventory into revenue. Days of sales in receivable which is also known as the days' sales outstanding is the duration in days that the firm takes to collect its outstanding debts from their debtors. The days of sales in receivable have continued to decrease over the period which shows that the firm is becoming more efficient in collecting its debts (Stent, Bradbury & Hooks, 2010). The reduction in the days of sales in receivable may also indicate that the firm is reducing credit sales thus reducing the number of the debtors of the firm. Inventory turnover of the firm has been on the below four over the period while the asset turnover has been on the increase over the same period.

The gross profit margin of the firm has increased from 35.07% in 2015 to 35.63% in 2918 which shows improvement in the management of the organization. The increase in the gross profit of a company indicates that the cost of goods sold has been reducing compared to the revenue generated from the sales of the firm. The operating profit margin of the firm has also increased from 12.66% in 2015 to 13.35% in 2018. Operational income is affected by the operational cost of the organization (Stent, Bradbury & Hooks, 2010). When the cost of operating decreases, the operating income is likely to increase as in the case witnessed in Ulta Beauty Company. The last in the profitability category is the net profit margin which ranges between 7.93% in 2015 and 9.44% in 2018. The net profit margin of the company has also increased over the period. The increase of the net profit act as an incentive to an investor who would be attracted to invest in the firm.

The basic earning power ratio is a financial ratio that measures the earning ability of the organization before the effect of the income tax. The ratio is calculated by dividing the earnings before taxes by the total assets of the organization. The basic earning power of the organization has increased from 24.67 in 2015 to 46.35 in 2018. Return on assets is the profitability ratio that indicates the percentage of the profit the firm earns using its assets. The return on assets of the firm increased from 14.34% in 2014 to 20.34% in 2018 (Stent, Bradbury & Hooks, 2010). The increase in the return on assets is an indication that the firm is using fewer resources to generate more revenue. The last is the return on equity which is a profitability ratio that measures the rate of the profit that is generated by the firm using owners’ equity. The return on equity of the firm increased from 22.85% in 2014 to 33.40% in 2018. The firm can improve its efficiency by reducing the operational expenses to help in generating more revenue to the firm by the end of the financial period.

DuPont analysis.

The return on equity of the organization has changed over the last three years. Nordstrom Inc. is one of the major competitors to ULTA Beauty which has a higher return on equity. The return on equity of ULTA Beauty was 23.79%, 27.38% and 33.40% for the year 2016, 2017 and 2018 respectively. Nordstrom's return on equity was 36.24%, 40.67% and 60.97% for the year 2016, 2017 and 2018 respectively. The difference in the return on equity shows that Nordstrom Inc. is more efficient in the use of its equity to generate revenue for the organization (Nordstrom Inc., 2019). The management of ULTA Beauty Company has the opportunity to adjust to help the organization increase its efficiency in the use of its shareholders' equity to generate more revenue to the firm.

The return on equity can be improved in different ways. The first step that can help the firm to improve its return on equity is to increase the debt financing relative to equity financing (Trainer, 2018). When more debts are used to finance the operations of the business, the net income realized will be divided by a smaller value of equity thus increasing the return on equity. The second step to increase the return on equity is the increase in the margin profit. The firm can increase the profit margin by attracting more customers to make more sales or increase its selling prices to generate more revenue from its sales. The third way to improve the return on equity is through efficient use of the assets of the organization to generate more revenue. When the revenues grow, the return on equity is likely to improve since the same net income is used to calculate the return on equity. The last strategy is to do overseas business where they will pay fewer taxes thus generating a more net income (Trainer, 2018).

Recommendations

The ULTA Beauty Company has financial strength that can help the firm to meet its current and long-term liabilities using the current and the non-current assets of the firm. The current ratio and the quick ratio of the organization are above one unit which shows that the firm can meet all its current obligations. The increase in the return on the investment ratios also shows that the firm can continue to pay its shareholders using the net income earned by the firm. The company can improve its financial strength by reducing the operational cost and increasing the revenue of the organization (Loeb, 2019). The organization can also improve its financial strength by identifying markets with low competitions so that the firm can generate more profits at a low cost. The last step is to automate the system which will help in reducing the dependency on the labor force thus reducing expenditures on labor.

Reflection

The first thing I have learned from the assignment is that the evaluation of the performance of the organization is vital in determining the success of the business. All business managers need to use the financial ratios to evaluate the performance of the firm compared to the performance of its competing companies. The financial ratios also help the managers to determine the structure of capital that is suitable for the organization to achieve the organizational goals. Common size analysis used to determine the changes in various items in the balance sheet and the income statement. The knowledge acquired in this assignment will help me to offer advisory services to the organizational managers on how to analyze the performance of the firm.

References

Loeb, W. (2019). Why Ulta Beauty Is Winning Customers And Keeps Growing Rapidly. Retrieved from https://www.forbes.com/sites/walterloeb/2019/03/18/why-ulta-beauty-wins-customers-and-keeps-growing-rapidly/#4a595321664a

Nordstrom Inc. (2019). JWN Nordstrom Inc. Stock Quote Price | Morningstar. Retrieved from https://www.morningstar.com/stocks/xnys/jwn/quote.html

Stent, W., Bradbury, M., & Hooks, J. (2010). IFRS in New Zealand: effects on financial statements and ratios. Pacific accounting review, 22(2), 92-107.

Trainer, D. (2018). Do not Get Misled By Return On Equity (ROE). Retrieved from https://www.forbes.com/sites/greatspeculations/2018/11/27/dont-get-misled-by-return-on-equity-roe/#c7dbcaa4ed4e

Ulta Beauty Inc. (2019). Income Statement for Ulta Beauty Inc. (ULTA) from Morningstar.com. Retrieved from http://financials.morningstar.com/income-statement/is.html?t=ULTA&region=usa&culture=en-US