Balance Sheet Seasonality Visualization

One of the most fundamental questions in financial analysis is understanding business seasonality. Seasonality is not always a yes-or-no question, but rather a continuum: some business are distinctly seasonal, and some less so. We all “know” that most tax preparation happens at a certain time of the year, while retail stocks vary quite a bit. But while revenue/Income Statement seasonality is “obvious,” in this post we will focus on Balance Sheet seasonality. We will use Ulta Beauty Inc. (ULTA) as an example.

As is the case with many retailers, ULTA skews towards Q4 (FYE is January). We can see how revenue and EBIT spike in Q4, but how does this affect Balance Sheet items? (chart viewer)

Let’s start with Cash and Equivalents on the Balance Sheet. The YoY balance will vary (for example, ULTA has used cash for share buybacks) but we can see that cash is at a low point in Q3 and spikes in Q4: the holiday season sales in Q4 build-up cash, while the inventory build-up into Q3 for the holiday selling season depletes cash. Unlike a B2B business, revenues translate to cash fairly quickly: consumers pay for their purchases in cash/card so there are no material Accounts Receivable. (chart viewer)

Speaking of Inventory on the Balance Sheet, we see the seasonality there, too. Inventory YoY increases as the company has more stores, but comparing Q3 to Q4, we can see the build-up and draw-down over Q3 and Q4. (chart viewer)

Since Inventory levels are related to sales, we can see the seasonality when we compare Inventory to Sales using the Days Sales Outstanding metric. We see the distinctive build-up into Q3 and then drop-down in Q4. Adding a 4-quarter moving average shows us that the company has gotten more efficient recently as managing inventory. (chart viewer)

Since ULTA is building up inventory into the holiday shopping season, we would expect that we can see a seasonable increase in Accounts Payable, as vendors ship product into Inventory but are not paid fully right away. The spikes then drop by Q4 end, as bills get paid. (chart viewer)

Similar to the Days Sales Outstanding in relation to Inventory, we can see the seasonality in Days Payables Outstanding in relation to Ulta’s payables. (chart viewer)

Our final highlight is Property, Plant and Equipment (PP&E) on the Balance Sheet: it also exhibits seasonality. In Ulta’s case, this line item grows through capital expenditures, mostly for new stores. We can see that how the balance of the account flatlines in sync with the selling season: the company opens very few stores during the main selling season, and then ramps back up into the new year. (chart viewer)

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