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Bolingbrook, lL-based leading beauty retailer Ulta Salon, Cosmetics & Fragrance Inc.’s (ULTA - Snapshot Report) second-quarter 2013 earnings of 70 cents per share beat the Zacks Consensus Estimate of 67 cents by 4.5%. Quarterly earnings climbed 29.6% from the year-ago quarter’s earnings of 54 cents and were also ahead of management’s guided range of 64 cents–67 cents per share. Earnings in the quarter received a boost from the company’s strong top line and higher margin.

Total revenue was $601.0 million in the second quarter, which climbed 24.8% year over year and were well above management’s projected range of $579 million to $589 million. In addition, revenues surpassed the Zacks Consensus Estimate of $589 million by 2.03%. Increased e-commerce as well as salon sales, higher comparable store sales and unit expansion drove the revenues during the quarter.

Quarter Highlight

Sales at Ulta.com increased 72% year over year, led by strong sales in prestige cosmetics and skin care categories. Comps in the quarter grew 8.4%, gaining from the rise in the average ticket. However, comps in the quarter were 130 basis points (bps) lower than the year-ago quarter’s comps of 9.7%. Ulta Salon’s value offerings, marketing initiatives, introduction of new products and brands played a key role in augmenting its overall business.  

Gross margin expanded 50 bps year over year to 35.3% in the second quarter, mainly attributable to leverage from solid top line and continued enhancement in merchandise margin.

In the reported quarter, operating income surged 26.8% year over year to $72.9 million, led by higher revenues. Selling, general and administrative expenses, as a percentage of sales, hiked 40 bps to 22.4%, as a result of higher investment in the company’s prestige brand boutiques.

Financial Position

Ulta Salon ended the second quarter with cash and cash equivalents of $286.2 million versus $293.2 million in the previous quarter.

Exiting the quarter, merchandise inventories stood at $461.2 million compared with $316.7 million at the end of the previous quarter. The increase was mainly attributable to the addition of 120 stores in the company’s operations since Jul 28, 2012.

Store Update

Ulta opened 33 stores in the quarter, thus bringing the total store count to 609. The company remains on track to open 53 stores in the third quarter.

During the quarter, the company increased the total number of Clinique boutiques to 90 with the addition of 39 boutiques. Ulta Salon also intends to launch 10 more Clinique boutiques in fiscal 2013. Additionally, the company added five Lancôme boutiques to its system and is also planning to introduce 20 more stores in the ensuing quarters.

Under the company’s loyalty program, the number of active members increased 19% year over year to 12 million.

The company’s plan to open 125 stores in 2013 and remodel seven stores reflects its strategy to continue focusing on store expansion.

Outlook

In the third quarter of 2013, Ulta expects earnings per share between 71 cents to 74 cents, an increase of 24%–25.4% from the year-ago quarter. Net sales are estimated in the range of $613 million to $623 million based on a comps growth of 5% to 7%.

For 2013, the Zacks Rank #2 (Buy) company retained its comps guidance. Ulta Salon expects to achieve comps growth of 5%–7%. The company continues to expect its 2013 earnings per share growth to be at the lower end of its long-term goal of 25% to 30%.

Our Take

We are encouraged by the company’s better-than-expected earnings growth and solid top line. Ulta Salon’s accelerating store growth, introduction of new brands, products and services, innovative promotional efforts and increasing focus on Ulta.com are expected to be highly beneficial for its business.

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