Grade: F — Major Red Flags
Framework: Schilit *Financial Shenanigans* + Beneish M-Score + forensic accounting principles
Data: SEC EDGAR 10-K (Filed 2026-03-26, FY ended January 31, 2026) + Yahoo Finance
Auditor: Ernst & Young LLP — Unqualified opinion
One-line verdict: Ulta Beauty's F grade is driven by a single red flag — cash of $510M covers only 23% of $2.2B in total debt — coupled with two watch items: goodwill surged 3,780% (from the Space NK acquisition) and "other assets" grew 142% versus 9.7% revenue growth. The underlying beauty retailer is performing well: revenue grew 9.7% to $12.4B, gross margins held at 39.1%, and free cash flow of $1.1B covers 93% of net income. The balance sheet concerns are mostly lease-driven (1,400+ stores) and acquisition-related (Space NK, the UK luxury beauty retailer), not signs of financial distress.
| Metric | Result |
|---|---|
| ❌ Red Flags | **1** (cash covers 23% of total debt) |
| ⚠️ Watch Items | **2** (goodwill surge 3,780%; soft asset growth 142%) |
| Checks Completed | **14/18** (4 N/A: insufficient data) |
| Beneish M-Score | **N/A** (insufficient data) |
| Altman Z-Score | **3.86** (safe zone) |
| Auditor | Ernst & Young LLP — Unqualified opinion |
The Largest Specialty Beauty Retailer
Per the filing, Ulta Beauty was "founded in Illinois in 1990 as a beauty retailer at a time when prestige, mass, and salon products were sold through distinct channels." The company "developed a unique specialty retail concept that offers a broad range of brands and price points, select beauty services, and a convenient and welcoming shopping environment." It estimates approximately 140 million beauty enthusiasts in the U.S.
The company expanded internationally through the acquisition of Space NK Limited, "a luxury beauty retailer operating in the U.K. and Ireland," plus a joint venture in Mexico and a franchise in the Middle East.
| Metric | FY2023 | FY2024 | FY2025 | FY2026 | Trend |
|---|---|---|---|---|---|
| Revenue | $10.2B | $11.2B | $11.3B | $12.4B | +9.7% in FY2026 |
| Net Income | $1.24B | $1.29B | $1.20B | $1.15B | Declining slightly |
| Gross Margin | 39.6% | 39.1% | 38.8% | 39.1% | Stable ~39% |
| CFFO | $1.5B | $1.5B | $1.3B | $1.5B | Stable |
| FCF | $1.2B | $1.0B | $1.0B | $1.1B | Stable |
Revenue growth re-accelerated to 9.7% in FY2026 after a slow FY2025 (+0.9%). Net income declined slightly from $1.20B to $1.15B despite revenue growth — the gap is explained by incremental costs from Space NK integration and international expansion. The filing shows "Gross profit 4,845,224 4,387,253 4,381,100" and SG&A rose from $2.81B to $3.30B, a 17.4% increase that compressed operating margins.
Cash Flow: Solid and Consistent
| Metric | FY2024 | FY2025 | FY2026 |
|---|---|---|---|
| Operating Cash Flow | $1.5B | $1.3B | $1.5B |
| Net Income | $1.29B | $1.20B | $1.15B |
| **CFFO / Net Income** | **1.16** | **1.08** | **1.30** |
| Free Cash Flow | $1.0B | $1.0B | $1.1B |
| **FCF / Net Income** | **0.78** | **0.83** | **0.93** |
Per the filing, "Net cash provided by operating activities $1,502,780 $1,338,605 $1,476,266." CFFO/NI of 1.30 means cash flow exceeds reported earnings by 30% — a clean signal. FCF/NI improving to 0.93 shows the business is converting nearly all reported earnings to cash. The accruals ratio of -5.0% is comfortably negative.
The Space NK Effect on the Balance Sheet
The two watch items — goodwill surging 3,780% and soft assets growing 142% — are both driven by the Space NK acquisition. Before the deal, Ulta had negligible goodwill. Post-acquisition, goodwill and intangibles rose to $0.4B but remain just 15% of total equity — well within manageable territory.
| Metric | Value | Assessment |
|---|---|---|
| Cash | $510M | Adequate for operations |
| Total Debt (incl. leases) | $2.2B | Lease-heavy |
| Cash/Total Debt | 23% | Red flag (lease-driven) |
| Debt/EBITDA | 1.2x | Excellent |
| Goodwill + Intangibles | $0.4B | 15% of equity |
| Z-Score | 3.86 | Safe zone |
Debt/EBITDA at 1.2x is among the best in retail. The "total debt" of $2.2B is overwhelmingly operating lease liabilities for 1,400+ beauty stores and salons. The filing notes the company maintains "a fixed charge coverage ratio" as a loan covenant — a ratio it easily satisfies.
The 18-Point Screening
Revenue Quality
| # | Check | Result | Detail |
|---|---|---|---|
| A1 | DSO Change | — | Insufficient data |
| A2 | AR vs Revenue Growth | — | Insufficient data |
| A3 | Revenue vs CFFO | ✅ | Revenue +9.7%, CFFO +12.3% |
Like most direct-to-consumer retailers, Ulta has minimal receivables — customers pay at the register or online. CFFO growing faster than revenue is a clean signal.
Expense Quality
| # | Check | Result | Detail |
|---|---|---|---|
| B1 | Inventory vs COGS | ✅ | Inventory +10.8% vs COGS +9.3% |
| B2 | CapEx vs Revenue | ✅ | CapEx +16.1% vs revenue +9.7% |
| B3 | SG&A Ratio | ✅ | SG&A/Gross Profit = 68.0% |
| B4 | Gross Margin | ✅ | 39.1%, +0.3pp |
Inventory growth tracking COGS growth closely is healthy. The filing states the company is adding stores (including new international locations), which naturally requires incremental inventory investment.
Cash Flow Quality
| # | Check | Result | Detail |
|---|---|---|---|
| C1 | CFFO vs Net Income | ✅ | CFFO/NI = 1.30 |
| C2 | Free Cash Flow | ✅ | FCF $1.1B, FCF/NI = 0.93 |
| C3 | Accruals Ratio | ✅ | -5.0% |
| C4 | Cash vs Debt | ❌ | Cash $0.5B covers 23% of $2.2B |
Balance Sheet
| # | Check | Result | Detail |
|---|---|---|---|
| D1 | Goodwill + Intangibles | ✅ | $0.4B = 15% of equity |
| D2 | Leverage | ✅ | Debt/EBITDA = 1.2x |
| D3 | Soft Asset Growth | ⚠️ | Other assets +142% vs revenue +9.7% |
| D4 | Asset Impairment | — | No data |
D3 is driven by new assets from the Space NK acquisition — goodwill, intangibles, right-of-use assets for UK/Ireland stores. This is a known, disclosed one-time event.
Acquisition Risk & Manipulation Score
| # | Check | Result | Detail |
|---|---|---|---|
| E1 | Serial Acquirer FCF | ✅ | FCF positive |
| E2 | Goodwill Surge | ⚠️ | Goodwill +3,780% (Space NK) |
| F1 | Beneish M-Score | — | Insufficient data |
Key Risks from the 10-K
1. Tariff Impact on Beauty Products
The filing warns: "Continuing dynamic global trade conditions and elevated tariff levels could contribute to increased input costs, supply chain disruption, pricing volatility, and heightened economic uncertainty." Beauty products are sourced globally, and tariff escalation could squeeze margins.
2. Consumer Spending Sensitivity
Per the risk factors: "Macroeconomic conditions, including inflation and elevated interest rates, as well as labor, transportation, and shipping cost pressures, have had, and may continue to have, a negative impact." The filing adds: "we expect the impact of inflationary and macroeconomic pressures to continue in 2026."
3. International Expansion Execution Risk
The Space NK acquisition, Mexico joint venture, and Middle East franchise represent Ulta's first significant international push. Per the filing, the company's "vision is to be the most loved beauty destination" globally. International expansion carries integration, cultural, and regulatory risks. Space NK operates in a different market segment (luxury) than Ulta's core U.S. format (cross-price-point).
4. Loyalty Program Dependence
Ulta's loyalty program is described as "best-in-class" with deep customer data. Per the filing, the program "enables members to earn points for products and beauty services and provides us with a deep understanding of our customers and their preferences." Any disruption to loyalty program economics — through competitive pressure or regulatory changes — could impact customer retention.
Summary
Grade: F. One lease-driven red flag; underlying beauty retailer is fundamentally sound.
Ulta Beauty's F grade is entirely driven by the cash-to-debt ratio where operating lease liabilities for 1,400+ stores dominate "total debt." Debt/EBITDA at 1.2x is excellent. Gross margins stable at 39%, FCF of $1.1B covering 93% of net income, and negative accruals ratio all indicate clean earnings quality.
The Space NK acquisition inflated goodwill and soft assets, but both remain at manageable levels (15% of equity). The real risks are qualitative: tariff pressure, macroeconomic sensitivity, and whether international expansion proves accretive. The core U.S. beauty business is a well-managed cash generator.
**Disclaimer**: This report is based on Ulta Beauty's FY2026 10-K filed with SEC EDGAR on March 26, 2026. This is NOT investment advice.
Data: SEC EDGAR 10-K + Yahoo Finance
Auditor: Ernst & Young LLP (Unqualified opinion)
Fiscal year ended: January 31, 2026