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Ulta Salon, Cosmetics & Fragrance, Inc.
1000 Remington Blvd.
Bolingbrook, IL 60440
Tel: (630) 410-4800 |
January 4, 2011
VIA EDGAR
Mr. H. Christopher Owings
Assistant Director
Division of Corporation Finance
Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549-3628
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Re: |
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Ulta Salon, Cosmetics & Fragrance, Inc.
Form 10-K for the fiscal year ended January 30, 2010
Filed March 31, 2010
Forms 10-Q for the periods ended May 1, 2010, July 31, 2010, and October 30, 2010
Filed June 3, 2010, September 2, 2010, and December 2, 2010, respectively
Definitive Proxy Statement on Schedule 14A
Filed May 7, 2010
File No. 1-33764
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Dear Mr. Owings:
On behalf of Ulta Salon, Cosmetics & Fragrance, Inc. (Ulta or the Company), I am
submitting our responses to the comment letter dated December 3, 2010 addressed to Mr. Carl Rubin,
Ultas President and Chief Executive Officer. The comments in your letter are duplicated below and
are followed immediately by the Companys responses.
Form 10-K for the fiscal year ended January 30, 2010
Item 1A. Risk Factors, page 14
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1. |
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Please delete the language in the last two sentences of the opening paragraph in which you
state that other unknown or immaterial risks may also impair your business operations. All
material risks should be described in your disclosure. If risks are not deemed material, you
should not reference them. |
Division of Corporation Finance
Securities and Exchange Commission
January 4, 2011
Page 2 of 11
We will revise our Risk Factors section in future filings to delete the language in the last two
sentences of the opening paragraph in which we state that other unknown or immaterial risks may
also impair our business operations.
Item 9A. Controls and Procedures, page 44
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2. |
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We note that you state that your disclosure controls and procedures were effective to
ensure that the information required to be disclosed by [you] in [y]our reports that [you]
file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized
and reported within the time periods specified. Please supplementally confirm, if true,
that your officers concluded that your disclosure controls and procedures were also effective
to ensure that information required to be disclosed in the reports that you file or submit
under the Exchange Act is accumulated and communicated to your management, including your
principal executive and principal financial officer, to allow timely decisions regarding
required disclosure. In addition, please confirm that you will revise future filings,
including any amendments to filings as applicable, accordingly. See Exchange Act Rule
13a-15(e). This comment also applies to your Form 10-Q for the fiscal period ended May 1,
2010, your Form 10-Q for the fiscal period ended July 31, 2010 and your Form 10-Q for the
fiscal period ended October 30, 2010. |
Our Chief Executive Officer and Chief Financial Officer concluded that as of January 30, 2010
(fiscal 2009), May 1, 2010 (first quarter 2010), July 31, 2010 (second quarter 2010) and October
30, 2010 (third quarter 2010), disclosure controls and procedures were effective in ensuring that
information required to be disclosed in the reports that the Company filed or submitted under the
Exchange Act was accumulated and communicated to the Companys management, including our principle
executive officer and principal financial officer, to allow timely decisions regarding required
disclosure. We confirm that we will revise our future filings, including any amendments to filings
as applicable, accordingly.
Item 15. Exhibits and Financial Statement Schedules, page 46
Statements of Income, page 50
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3. |
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Your discussion of operating expenses on page 35 indicates a portion of depreciation and
amortization is classified within selling, general and administrative expenses and excluded
from cost of goods sold. Please revise the description of the cost of goods sold line item
in future filings to comply with SAB Topic no. 11.B. |
We acknowledge the Staffs comment and believe our accounting and disclosure is in compliance with
current generally accepted accounting principals (GAAP) and Securities and
Exchange Commission (SEC) rules and guidance. We do not believe the guidance prescribed by SAB
Topic 11B applies to our facts given that the Company is not excluding depreciation and
Division of Corporation Finance
Securities and Exchange Commission
January 4, 2011
Page 3 of 11
amortization from cost of sales or operating expenses. The following table sets
forth depreciation and amortization expense for the periods indicated:
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Fiscal |
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2009 |
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2008 |
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2007 |
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Depreciation and amortization included in
cost of sales |
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$ |
51,919 |
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$ |
42,751 |
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$ |
34,533 |
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Depreciation and amortization included in
selling, general and adminstrative expenses |
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10,247 |
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8,694 |
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4,970 |
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Total
depreciation and
amortization expense |
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$ |
62,166 |
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$ |
51,445 |
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$ |
39,503 |
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As described on page 35 of the Form 10-K, cost of sales includes depreciation and amortization
related to warehousing and distribution activities as well as depreciation and amortization related
to store fixturing and construction. Selling, general and administrative (SGA) expenses, which are
considered operating expenses, includes depreciation and amortization for all assets except those
related to our retail and warehouse operations, which is included in cost of sales, meaning SGA
includes depreciation and amortization for general corporate use assets only. This disclosure is
replicated in our policy note on page 58 of the Form 10-K which describes cost of sales and
selling, general and administrative expenses.
We believe our existing disclosure is consistent with current GAAP and SEC requirements.
2. Summary of significant accounting policies, page 55
General
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4. |
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We assume the absence of disclosure related to segment reporting suggests you have
concluded that you have only one reportable segment. Please explain to us in detail how you
determined you have one reportable segment. Please also tell us if you aggregate operating
segments, and if so, how the aggregation into one reportable segment complies with the
aggregation requirements of FASB ASC 280-10-50. Lastly, revise your future disclosure to
comply with the requirements of FASB ASC 280-10-50-21. Please show us what your revised
disclosure will look like. |
The Company has determined that it has three operating segments: retail stores, salon services and
e-commerce. The operating results for these operating segments are reviewed regularly by
our Chief Executive Officer, who operates as our chief operating decision maker (CODM). The salon
services and e-commerce operating segments do not meet the quantitative thresholds prescribed by
ACS 280-10-50-12 for separate disclosure. We believe that salon services and e-commerce also meet
the majority of the aggregation criteria in ACS 280-10-50-11 which allows both operating segments
to be combined with retail stores into one reportable segment pursuant to 280-10-50-13. In
addition, management does not believe that separate disclosure would be helpful to the readers of
the financial statements. We disclose in the Basis of presentation section on page 34 of the
Form 10-K that our salon service revenue represents less than 10% of our combined product sales and
service revenues. E-commerce sales were low single digits
Division of Corporation Finance
Securities and Exchange Commission
January 4, 2011
Page 4 of 11
compared to the Companys fiscal 2009 combined net sales.
We will revise future filings to include the following disclosure in both our Management Discussion
and Analysis and notes to financial statements:
Segment reporting
The Company has determined its operating segments on the same basis that it uses to internally
evaluate performance. The Company has combined its three operating segments: retail stores, salon
services and e-commerce, into one reportable segment.
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5. |
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Please disclose in tabular form for each period presented the amount or percentage of total
revenue contributed by each class of similar products or services. In this regard we note
you offer salon services and products including make-up, skincare, fragrances and styling
tools. Please refer to FASB ASC 280-10-50-40. See also Item 101(c)(1) of Regulation S-K as
it relates to disclosure in your Business description. |
We have considered FASB ASC 280-10-50-40 with respect to our disclosure and believe we are in
compliance in all material respects. We have determined that salon services revenue is not
material and does not require separate disclosure. We also do not believe that separate disclosure
of salon services revenue would be beneficial to readers of the financial statements. We describe
for our reader in Item 1. Business, Merchandising beginning on page 9 of the Form 10-K that our
retail stores carry a variety of beauty-related products including prestige and mass cosmetics,
fragrance, haircare, skin care, bath and body products and salon styling tools. We believe all of
these products are part of one product category, personal care products.
We also believe we are in compliance with Regulation S-K Item 101(c)(1) generally and Item
101(c)(1)(i) specifically in all material respects in Item 1. Business, Overview beginning on
page 3 of the Form 10-K because we provide the reader with a significant amount of qualitative
information describing our products, services, principal markets and methods of distribution. We
do not believe additional disclosure is required based on our conclusion that salon services
revenue is immaterial and that all of the retail products sold in our retail stores are part of one
product category, personal care products.
Revenue recognition, page 57
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6. |
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You disclose that e-commerce sales are recorded upon shipment of merchandise. Please
expand your disclosure to state when title transfers to the customer. Further, please
explain to us how your accounting policy complies with the delivery and performance
requirements of SAB Topic 13:A. If shipping terms determine risk of loss during shipment
and/or title transfer to the customer, please explain the terms to us and revise your
disclosure to clarify these terms. If revenue on e-commerce sales is recognized prior to the
transfer of title and |
Division of Corporation Finance
Securities and Exchange Commission
January 4, 2011
Page 5 of 11
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delivery of the product to the customer, please clarify how your policy complies with
GAAP. |
E-commerce sales were low single digits compared to the Companys fiscal 2009 combined net sales.
E-commerce sales are not material to our financial results and, therefore, we do not believe
further disclosure in our financial statements is required or provides any additional benefit to
users of our financial statements. Currently, we record sales at the time of shipment by our third
party carrier because we believe this is the most reliable measurement from a control perspective.
We estimate that in-transit goods represented approximately $200,000 of revenue and $50,000 of
margin at any one quarterly balance sheet date during fiscal 2009. We do not believe that the
benefit associated with estimating in-transit goods outweigh the cost. If e-commerce sales become
material to our financial results in the future, we will disclose our accounting policy and ensure
that it is consistent with SAB Topic 13A.
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7. |
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Please explain to us and disclose your policy for granting product returns. Further,
please explain to us how accurate your historical estimates for the past three fiscal years
have been with respect to estimating your allowance for sales returns, and how variances
between actual and estimated returns are tracked and reviewed by management. Lastly,
reference is made to your valuation and qualifying accounts disclosure on page 68. Explain
to us in detail why you did not disclose the allowance for sales returns activity, or revise
your disclosure. Please refer to Rules 5-04 and 12-09 of Regulation S-X. |
The Companys return policy generally provides for a full refund of the customers purchase price
as long as the product is returned within 60 days of the original purchase provided certain
conditions are met. In future filings we will revise our Revenue recognition disclosure to
indicate our policy for granting product returns.
Actual product returns are tracked and our sales return reserve is adjusted on a monthly basis
based on data from our point of sale (POS) system. The sales return reserve represents the
difference between the estimated net sales return and the corresponding gross margin adjustment,
and the reserve is included in the Other accrued liabilities item of the Accrued liabilities
note on page 61 of the Form 10-K.
The historical year end sales return estimates as compared to the actual results are as follows:
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Fiscal |
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(Dollars in thousands) |
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2009 |
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2008 |
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2007 |
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Sales return estimate (A) |
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$ |
(1,289 |
) |
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$ |
(1,182 |
) |
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$ |
(1,013 |
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Cost of sales adjustment |
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736 |
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677 |
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588 |
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Net reserve |
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$ |
(553 |
) |
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$ |
(505 |
) |
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$ |
(425 |
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Sales return estimate (A) |
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$ |
(1,289 |
) |
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$ |
(1,182 |
) |
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$ |
(1,013 |
) |
Actual returns |
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(1,338 |
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(1,023 |
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(738 |
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Variance (unfavorable) / favorable |
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$ |
(49 |
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$ |
159 |
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$ |
275 |
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Division of Corporation Finance
Securities and Exchange Commission
January 4, 2011
Page 6 of 11
We believe the above analysis documents that our historical sales return reserve represents a
reasonable estimate in all material respects.
The Companys sales return reserve has not been disclosed in past filings because the Company did
not consider its sales return reserve to be a valuation and qualifying account as it does not
represent a deduction from a related balance sheet account as defined in Rule 12-09 or Regulation
S-X. In addition, the Company does not believe that the sales return reserve qualifies for
separate disclosure due to its immaterial nature. We will disclose this information in future
filings should we determine it to be material.
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8. |
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Please expand your policy for unredeemed gift cards to indicate whether or not gift cards
are sold with expiration dates. Further, explain to us and disclose how revenue is
recognized on unredeemed gift cards. Lastly, tell us and disclose the amount of deferred
gift card revenue for the past two fiscal years ended January 30, 2010 and January 31, 2009. |
Our gift cards do not expire and, historically, we have not recognized revenue from unredeemed gift
cards due to statutory escheat requirements as well as materiality considerations. We are
currently reevaluating our gift card program structure. Unearned gift card revenue as of January
30, 2010 and January 31, 2009 was $9.9 million and $7.9 million, respectively, which is included in
the Accrued customer liabilities item of the Accrued liabilities note on page 61 of the Form
10-K.
In future filings we will revise our Revenue recognition disclosure to indicate the Companys
treatment of unredeemed gift cards and the amount of deferred gift card revenue for the past two
fiscal years.
Cost of sales, page 58
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9. |
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Please disclose your policy for classifying shipping and handling costs in the statements
of income. If shipping costs or handling costs are significant and are not classified in
cost of sales, disclose the amount(s) of these costs and the line item that includes them.
Please refer to FASB ASC 605-45-50-2. |
E-commerce sales were low single digits compared to the Companys fiscal 2009 combined net sales.
E-commerce shipping and handling costs are not significant. We will revise our Cost of sales
disclosure in future filings to include shipping and handling costs.
Self-insurance, page 58
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10. |
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We note from your disclosure under Critical accounting policies and estimates on page 42
that your reserves for self-insurance have steadily declined over the
past three years despite the significant increase in the number of stores, employees and
sales. Please explain to us the reason for the decrease and include in your response a
table showing year end balances of the reserve and additions, |
Division of Corporation Finance
Securities and Exchange Commission
January 4, 2011
Page 7 of 11
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subtractions and adjustments made during the year. To the extent material, please
include a tabular presentation of your reserve activity in future filings. You may provide
such information as part of your analysis of reserve accounts. included in Schedule 11 to
your financial statements. |
The Companys self-insurance reserves as disclosed in our critical accounting policies on page 42
of the Form 10-K represent expense accruals related to employee healthcare and workers compensation
/ general liability. The Companys workers compensation and general liability insurance plan is a
loss sensitive program which includes a $250,000 self-insured retention for each claim (June 2010
May 2011 plan year). The Company makes collateral and premium payments according to the agreed
fee schedule, and there is an audit of the insurers records at the end of the plan year to
determine if there is additional premium due to/from the Company based on actual claim results.
The insurer maintains all case and incurred but not reported case reserves.
The healthcare accrual represents the normal processing of healthcare claims pursuant to claims
data provided by a third party claims processor each month. The balance at the end of the period
represents the estimate of incurred but not reported healthcare claims which equals approximately
30 days of claims activity.
The following table sets forth the annual prepaid asset and related accruals for workers
compensation / general liability as well as the healthcare accrual for the periods indicated:
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Balance at |
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Charged to |
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Balance at |
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beginning |
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costs and |
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end |
(dollars in thousands) |
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of period |
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expenses |
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Deductions |
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of period |
Fiscal 2009 |
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Prepaid workers comp / general liability |
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430 |
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(3,195 |
) |
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3,946 |
(a) |
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1,181 |
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Insurance accruals: |
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Workers comp / general liablity |
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61 |
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(475) |
(b) |
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414 |
(c) |
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Healthcare |
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1,803 |
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16,710 |
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(16,934 |
) |
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1,579 |
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Fiscal 2008 |
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Prepaid workers comp / general liability |
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295 |
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(3,514 |
) |
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3,649 |
(a) |
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430 |
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Insurance accruals: |
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Workers comp / general liablity |
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830 |
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(246) |
(b) |
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(523) |
(c) |
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61 |
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Healthcare |
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1,617 |
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15,625 |
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(15,439 |
) |
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1,803 |
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Fiscal 2007 |
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Prepaid workers comp / general liability |
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228 |
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(2,541 |
) |
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2,608 |
(a) |
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295 |
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Insurance accruals: |
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Workers comp / general liablity |
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1,095 |
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888 |
(b) |
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(1,153) |
(c) |
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830 |
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Healthcare |
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1,202 |
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12,686 |
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(12,271 |
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1,617 |
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(a) |
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represents workers comp / general liability collateral and premiums paid in advance in
accordance with the annual contract fee schedule. |
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(b) |
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represents accrual adjustments per independent actuarial study indicating the Company was under
/ (over) paying with respect to its insurance collateral / premium. |
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(c) |
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represents insurance premium adjustments issued by the Companys insurer. |
Division of Corporation Finance
Securities and Exchange Commission
January 4, 2011
Page 8 of 11
In response to the Staffs question regarding insurance expense trends over the three year
period, the above table evidences that healthcare insurance expense increased approximately 7% and
23% in fiscal 2009 and 2008, respectively. The lower rate of increase in fiscal 2009 is due to
certain changes in the plan including increased employee contributions. Workers compensation /
general liability insurance also increased approximately 9% and 38% in fiscal 2009 and 2008,
respectively. Again, the fiscal 2009 rate of increase is lower because we renegotiated our
policies and have had better loss experience in the last several years due to management
initiatives to control cost including improving safety programs and communication. The decrease in
the workers compensation / general liability accrual from fiscal 2007 through fiscal 2009 is
primarily due to the fact that the Companys loss experience has steadily improved during the last
several years and the prepaid premium amounts paid to the insurer were adequate for the periods
covered and did not require the Company to accrue additional premium adjustments.
Upon further assessment of the current structure of our insurance programs, we do not believe that
healthcare and workers compensation / general liability insurance accruals qualify as significant
estimates or critical accounting policies. We will eliminate this disclosure in future filings.
Definitive Proxy Statement on Schedule 14A
Section 16(a) Beneficial Ownership Reporting Compliance, page 38
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11. |
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We note your statement that Ms. Kirby untimely filed one report. Please supplementally
tell us the number of transactions that were not reported on a timely basis due to the
failure to file such report, and confirm that you will include such required disclosure in
future filings as applicable. Refer to Item 405(a)(2) of Regulation S-K. |
Due to an inadvertent administrative error, one transaction was filed one day late. All other
transactions were reported on a timely basis. We confirm that we will include such required
disclosure in future filings as applicable.
Article IV. Compensation Committee Report and Compensation Discussion and Analysis, page 23
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12. |
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You state that your executive compensation is evaluated against market based surveys and a
pre-determined peer group. Please revise your disclosure in future filings to identify the
benchmarks used in determining the base salaries and annual bonuses (as a percentage of base
pay) of your executive officers, as well as the components of the benchmarks. In addition,
please disclose in future filings the companies that participated in the Towers Perrin CDB,
Retail Industry survey and the Towers Perrin CDB, General Industry survey, or tell us why you
are not required to do so. Refer to Item 402(b)(2)(xiv) of Regulation S-K. Please show us
what your proposed revised disclosure will look like. |
Division of Corporation Finance
Securities and Exchange Commission
January 4, 2011
Page 9 of 11
In future filings we will clarify that the market references for setting base salaries and
annual bonuses are the surveys and peer group as described on page 25 of the Proxy. The Towers
Perrin CDB, Retail Industry survey and the Towers Perrin CDB, General Industry survey consist of
aggregated data, and do not specifically reference individual participating companies. As a
result, the Compensation Committee is not aware of the individual companies participating in the
surveys and did not benchmark to any individual companies which participated in the surveys.
Rather, the Compensation Committee only referenced the composite aggregated data of the surveys for
purposes of determining market practices.
In future filings, to the extent that the Company relies upon similar general market surveys, we
will disclose such surveys. To the extent that the Company benchmarks against individual
companies, similar to the peer group described on page 25 of the Proxy, the Company will identify
in future filings all individual companies with which we benchmark.
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13. |
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With respect to your engagement of your compensation consultant, please revise your
disclosure in future filings to expand upon the nature and scope of the consultants
assignment, and the material elements of the instructions or directions that you gave to the
consultant with respect to the performance of its duties under the engagement. Refer to Item
407(e)(3)(iii) of Regulation S-K. Please show us what your proposed revised disclosure will
look like. |
In future filings we will expand upon the nature and scope of our compensation consultants
assignment and include the material elements of any instructions or directions we give to the
consultant with respect to the performance of its duties. Pursuant to its charter, the
Compensation Committee (the Committee) is authorized to retain and terminate any consultant, as
well as approve the consultants fees, scope of work and other terms of retention. In 2009 the
Committee retained compensation consultant Towers Perrin (known as Towers Watson after merging with
Watson Wyatt Worldwide effective January 1, 2010). During the period in question, Towers Watson
advised the Committee on compensation issues and kept the Committee apprised of regulatory
developments and competitive practices related to executive compensation practices. For fiscal
2009-2010, Towers Watson provided competitive market data and advice, when requested by the
Committee. In particular Towers Watson provided the Committee with information related to
competitive incentive design practices and stock ownership guidelines. Towers Watson, however, did
not determine or recommend the exact amount or form of executive compensation for any executive
officers. Towers Watson reported directly to the Committee. A representative of Towers Watson,
when requested, attended meetings of the Committee, was available to participate in executive
sessions and communicated directly with the Committee Chair or its members outside of meetings.
The approval of the Chair of the Committee, acting on authority delegated by the Committee, was
required for any other work to be done for the Company and its
affiliates by Towers Watson.
Compensation Risk, page 23
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14. |
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We note your disclosure in response to Item 402(s) of Regulation S-K. Please supplementally
describe the process you undertook to reach your determination |
Division of Corporation Finance
Securities and Exchange Commission
January 4, 2011
Page 10 of 11
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that your compensation plans, practices and policies are not reasonably likely to have a
material adverse effect on the Company. |
A multi-disciplinary team consisting of finance, human resources, legal and audit personnel
reviewed the Companys variable pay plans, practices and policies and evaluated and identified the
following:
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Risk in pay plan design process; |
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Risk in pay plan content; and |
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Risk levels of pay plans. |
Based on this review, the team determined that the Company did not have any compensation plans,
practices or polices that created risks that were reasonably likely to have a material adverse
effect on the Company, for the following reasons:
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The Companys variable compensation programs are linked to specific performance metric
goals set by the Compensation Committee for executive officers and for other employees by
supervisors consistent with the Companys compensation philosophy and business goals; |
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The performance periods for the pay programs are designed to match the period for
which the employee had influence on the results; |
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Payments under the incentives are capped; |
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Payments are reviewed by the Compensation Committee, payroll and human resources and
are subject to spot audits; |
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The mix between mixed and variable pay is balanced so as to neither discourage proper
risk taking nor encourage excessive risk taking; and |
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No participant is allowed to approve his or her own performance goals or payout. |
The team presented its analysis and assessment of these matters to management and the Compensation
Committee, which concurred.
**********
Division of Corporation Finance
Securities and Exchange Commission
January 4, 2011
Page 11 of 11
In responding to the Divisions comments, the Company acknowledges that:
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The Company is responsible for the adequacy and accuracy of the disclosure
in this filing; |
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Staff comments or changes to disclosure in response to staff comments do
not foreclose the Commission from taking any action with respect to the filing; and |
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The Company may not assert staff comments as a defense in any proceeding
initiated by the Commission or any person under the federal securities laws of the
United States. |
If you have any questions or comments regarding the Companys responses, or if you require any
additional information, please call me at (630) 410-4716.
Sincerely,
/s/ Robert S. Guttman
Robert S. Guttman
Senior Vice President, General Counsel & Secretary