Ulta Beauty (ULTA) Risk Analysis

In addition to merchandise provided by vendors, we offer private label brand merchandise, which subjects us to certain risks, including: - our ability to successfully and profitably conduct sourcing and manufacturing activities internally or with third-party agents, manufacturers, and distributors;- our failure or our manufacturers' failure to comply with applicable regulatory requirements, including product safety, working age and conditions, anti-corruption, import and customs, and retail sale restrictions;- potential mandatory or voluntary product recalls;- claims and lawsuits resulting from injuries associated with the use of our private label brand merchandise;- our ability to successfully protect our intellectual property or other proprietary rights (e.g., defending against counterfeit, knock-offs, grey-market, infringing, or otherwise unauthorized goods);- our ability to successfully navigate and avoid claims related to the intellectual property or other proprietary rights of third parties;- sourcing and manufacturing outside the United States, including foreign laws and regulations, political unrest, disruptions or delays in cross-border shipments, changes in economic conditions in foreign countries, exchange rate and import duty fluctuations, and conducting activities with third-party manufacturers; and - price increases of raw materials used in the manufacturing of our private label brand merchandise and other risks generally encountered by entities that source, manufacture, market, and retail private label brand merchandise. Our failure to adequately address some or all of these risks could have a material adverse effect on our business, results of operations, and financial condition.

We must maintain sufficient inventory levels of merchandise that our guests desire to successfully operate our business. A shortage of popular merchandise could reduce our net sales. Conversely, we also must seek to avoid accumulating excess inventory to maintain appropriate in-stock levels. If we overstock unpopular merchandise, then we may be forced to take significant inventory markdowns or miss opportunities for the sale of other merchandise, both of which could have a negative impact on our profitability, and, in turn, our sales may decline or we may be required to sell the merchandise we have obtained at lower prices. If we are not successful in managing our inventory balances, our results of operations may be negatively affected.

Failure to adapt to a rapidly changing technological environment or failure to adopt emerging technologies, including advances relating to AI and agentic commerce, in a timely manner could negatively affect our business. For example, if we are unable to match or surpass the advances in technologies and capabilities of our competitors for either external (guest)-facing or internal use cases, our competitive position could be adversely affected. In addition, if we adopt new technologies such as AI and fail to deploy them effectively or if we, our associates, or third parties acting at our direction use them incorrectly, unethically, or illegally, it could have a negative impact on our business, reputation, and financial results. The development of AI technologies is complex, and there are technical and other challenges associated with achieving the desired level of accuracy, efficiency, and reliability. The algorithms and models utilized in generative AI systems may have limitations, including biases, errors, or the inability to handle certain data types or scenarios. Additionally, there is a risk of system failures, disruptions, or vulnerabilities that could compromise the integrity, security, or privacy of data inputs or generated content. These limitations or failures could result in reputational harm, legal liabilities, or loss of guest, employee, or business partner confidence. Uncertainty regarding the regulation of AI and other burgeoning technologies may require significant resources to modify and maintain business practices to comply with U.S. and non-U.S. laws, the nature of which cannot be determined at this time. An increasing number of jurisdictions around the globe, including several U.S. states, have already proposed or enacted laws governing AI. Other jurisdictions may decide to adopt similar or more restrictive legislation that may render the use of such technologies challenging. These obligations may make it harder for us to conduct our business using AI, lead to regulatory fines or penalties, require us to change our business practices, or prevent or limit our use of AI. If we are unable to effectively use AI, or that use is restricted, our business may be less efficient, or we may be at a competitive disadvantage. Any of these factors could have a material adverse effect on our business, financial condition, profitability, and cash flows.

Our financial performance could be affected by our ability to successfully grow and optimize our retail store footprint. There is no assurance that we will be able to locate and lease adequate desirable locations that meet our criteria. Additionally, our ability to negotiate favorable lease terms depends on conditions in the real estate markets, including competition for desirable properties, our relationships with current and prospective property owners or shopping center operators, and other factors that may be outside our control. Our financial performance could be further adversely affected if we are unable to successfully optimize our existing retail store fleet, including by opening new stores and relocating existing stores in desirable locations, renewing or extending leases, restructuring leases to obtain more favorable renewal terms, refreshing and remodeling existing stores, and, if necessary, closing underperforming and poorly located stores. If any aspect of our real estate growth and/or optimization strategy does not achieve the results we expect, in whole or in part, we may fail to meet our performance expectations.

From time to time, we are subject to litigation, including potential class action and single-plaintiff litigation, and other legal or regulatory proceedings or claims in the ordinary course of our business operations regarding, but not limited to, employment matters, consumer claims, security of consumer and employee personal information, product labeling or content, advertising compliance, contractual relations with suppliers, marketing, and infringement of trademarks and other intellectual property rights. Litigation to defend ourselves against claims by third parties, or to enforce any rights that we may have against third parties, may be necessary, which could absorb significant management time and/or result in substantial costs and diversion of our resources, causing a material adverse effect on our business, financial condition, profitability, and cash flows. We establish accruals for potential liabilities arising from litigation and other legal or regulatory proceedings or claims when potential liability is probable and the amount of the loss can be reasonably estimated based on currently available information. We may still incur legal costs for a matter even if we have not accrued a liability. In addition, actual losses may be higher than the amount accrued for a certain matter, or in the aggregate. Any resolution of litigation or other legal or regulatory proceedings or claims could materially adversely impact our business, financial condition, profitability, and cash flows. Specifically, our technologies, promotional products purchased from third-party vendors, and/or Ulta Beauty branded products, or potential products in development, may infringe rights under patents, patent applications, trademark, copyright, or other intellectual property rights of third parties in the United States and abroad. These third parties could bring claims against us that would cause us to incur substantial expenses and, if successful, could cause us to pay substantial damages. Further, if a third party were to bring an intellectual property infringement suit against us, we could be forced to stop or delay development, manufacturing, or sales of the product that is the subject of the suit. As a result of intellectual property infringement claims, or to avoid potential claims, we may choose to seek, or be required to seek, a license from the third party and would most likely be required to pay license fees or royalties or both. These licenses may not be available on acceptable terms, or at all. Ultimately, we could be prevented from commercializing a product or be forced to cease some aspect of our business operations if, as a result of actual or threatened intellectual property infringement claims, we are unable to enter into licenses on acceptable terms. Even if we were able to obtain a license, the rights may be non-exclusive, which would give our competitors access to the same intellectual property. The inability to enter into licenses could harm our business significantly. We maintain insurance coverages with third-party insurers. However, not every risk or liability is or can be protected by insurance, and, for those risks we insure, the limits of coverage we purchase or that are reasonably obtainable in the market may not be sufficient to cover all actual losses or liabilities incurred. Liability insurance coverage is expensive and there is a risk that commercially available liability insurance will not continue to be available to us at a reasonable cost, if at all. If we or other industry participants sustain significant losses or make significant insurance claims, our ability to obtain future insurance coverage at commercially reasonable rates could be materially adversely affected. An inability to obtain liability insurance, significant increases in the cost of insurance we obtain, or losses in excess of our liability insurance coverage could have a material adverse effect on us. Any insurance we carry reflects deductibles, self-insured retentions, limits of liability, and similar provisions that we believe are prudent based on our operations. To offset negative insurance market trends, we may elect to self-insure, accept higher insurance deductibles, or reduce the amount of insurance coverage in response to market changes. Additionally, we self-insure a portion of expected losses under our workers' compensation, general liability, Texas non-subscription plan, and group health insurance programs. We currently self-insure a portion of our commercial insurance deductible risk through our captive insurance company. To the extent that our captive insurance company is unable to bear the insured risk, we may be required to fund additional capital to our captive insurance company or to bear the loss. We use the services of independent actuaries for loss adjustment expense reserve analyses for the aforementioned lines of insurance. Liabilities associated with these lines of insurance are based on actual claim data and estimates of incurred but not reported claims developed using actuarial methodologies, and may be based on historical claim trends, industry factors, claim development, as well as other actuarial assumptions. Unanticipated changes in any applicable actuarial assumptions and management estimates underlying our recorded liabilities for these losses, variability in inflation rates, changes in the nature and method of claims settlement, benefit level changes due to changes in applicable laws, insolvency of insurance carriers, and changes in discount rates could result in materially different expenses than expected under these programs, which could have a material adverse effect on our results of operations and financial condition. We require many of our vendors to carry their own insurance, and we have indemnity agreements with many of our vendors, but we cannot be assured that (1) any specific claim or lawsuit will be subject to a vendor's insurance or indemnity agreement, (2) our vendors will carry or maintain such insurance coverage or meet their indemnity obligations, or (3) we will be able to collect payments from our vendors sufficient to offset liability losses or, in the case of our private label brand products, where almost all of the manufacturing occurs outside the United States, that we will be able to collect anything at all.

Epidemics, pandemics, and other public health crises, natural disasters, such as hurricanes, tornados, wildfires, earthquakes, and mudslides, as well as conflicts, such as wars, acts of violence, and terrorism, have resulted in the temporary closure of our stores and, in the future, could also result in physical damage to our properties, the temporary closing of our stores, the temporary closing of our distribution, fast fulfillment, and market fulfillment centers, the temporary lack of an adequate work force, the temporary or long-term disruption in the supply of products (or a substantial increase in the cost of those products) from domestic or foreign suppliers, the temporary disruption in the delivery of goods both to and from our distribution, fast fulfillment, and market fulfillment centers (or a substantial increase in the cost of those deliveries), the temporary reduction in the availability of products in our stores and/or the temporary reduction in visits to stores by guests. Accordingly, if one or more epidemics, pandemics, natural disasters, and/or acts of violence or terrorism were to occur in the future, it could have a material adverse effect on our business, financial condition, profitability, and cash flows or may require us to incur increased costs.