Ulta Beauty, Inc. (ULTA Quick QuoteULTA - Free Report) posted robust second-quarter fiscal 2023 results, wherein the top and bottom lines increased year over year and beat the Zacks Consensus Estimate.

During the quarter, the company witnessed growth in all major categories (with skin care standing out), an increased number of loyalty members and greater brand engagement. The beauty category continued to generate growth. Ulta Beauty’s strong business model, diverse assortment and solid loyalty program helped drive the splendid results and encouraged management to raise its guidance for fiscal 2023.

Quarterly Numbers

Ulta Beauty posted earnings per share (EPS) of $6.02 in the quarter, which beat the Zacks Consensus Estimate of $5.87 and increased 5.6% year over year.

Net sales of this beauty product retailer rose 10.1% year over year to $2,529.8 million and beat the Zacks Consensus Estimate of $2,508 million. The uptick can be attributed to higher comparable sales, solid new store performance and an increase in other revenues.

Comparable sales (sales for stores open for at least 14 months and e-commerce sales) jumped 8% compared with our estimate of 5.9% growth. Comparable sales growth was driven by a 9% improvement in transactions, partly offset by a 1% drop in the average ticket.

The gross profit advanced 7.1% to $993.6 million. The gross profit, as a percentage of net sales, was 39.3%, down 110 basis points year over year. Higher inventory shrink, reduced merchandise margins and elevated supply-chain costs were partly made up by strength in other revenues and store fixed-cost leverage.

SG&A expenses rose 12.4% to $600.7 million. As a percentage of net sales, SG&A expenses came in at 23.7%, up from 23.3% reported in the year-ago quarter. We had expected SG&A expenses to be 25.6% of net sales in the quarter. The year-over-year increase in SG&A expenses was due to the deleverage of store payroll and benefits, increased store expenses and corporate overheads related to strategic investments, somewhat compensated by the leverage of incentive compensations.

The operating income rose from $391.4 million to $391.6 million. The operating margin decreased from 17% to 15.5% compared with our estimate of 15.1%.

Other Updates

Ulta Beauty ended the quarter with cash and cash equivalents of $388.6 million. Net merchandise inventories were $1.8 billion at the end of the second quarter of fiscal 2023. Stockholders’ equity at the end of the quarter stood at $2,051.9 million. Net cash provided by operating activities was $428.8 million in the 26 weeks ended Jul 29, 2023.

The company repurchased 593,629 shares for $275.5 million in the quarter. In the first six months of fiscal 2023, ULTA repurchased 1.1 million shares for $559 million. As of Jul 29, 2023, Ulta Beauty had shares worth $541 million left under its buyback program announced in March 2022. The company anticipates a share repurchase of $900 million in fiscal 2023.

For fiscal 2023, the capital expenditure is expected in the band of $400-$475 million.

In the reported quarter, Ulta Beauty introduced three new stores, remodeled three and relocated two. Ulta Beauty ended the second quarter with 1,362 stores totaling 14.3 million square feet.

For fiscal 2023, ULTA expects 25-30 net new stores, along with 20-30 store remodeling and relocation projects.

Guidance

Ulta Beauty now expects fiscal 2023 net sales in the range of $11.05-$11.15 billion compared with the $11-$11.1 billion band expected earlier. The company reported net sales of $10.2 billion in fiscal 2022.

Comparable sales are expected to rise 4.5%-5.5%, up from 4-5% growth expected earlier. The company expects comps growth to moderate-to-low-single-digit growth in the second half of the year.

Management expects an operating margin between 14.6% and 14.8% compared with the previous view of 14.5-14.8%. This includes expectations of nearly even deleverage from the gross margin and SG&A.

Management expects the operating margin to be under more pressure in the third quarter than the second quarter as it laps pricing gains (compared with the year-ago period) and due to an investment spending shift from the second quarter to the third quarter. Consequently, the third-quarter EPS is likely to decline year over year.

For fiscal 2023, earnings are envisioned in the band of $25.10-$25.60 per share, suggesting a rise from the $24.01 per share reported in fiscal 2022. Management earlier projected the bottom line in the range of $24.70-$25.40 per share.

This Zacks Rank #3 (Hold) stock has risen 0.6% in the past three months compared with the industry’s 0.9% growth.

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