Ulta’s Q2 Beats, Guides In-line

Ulta Salon Cosmetics & Fragrances Inc. (ULTA - Snapshot Report) recently reported better-than-expected fiscal second-quarter results driven by the launch of new stores.

The company’s reported net income expanded nearly 56% year over year to $5.8 million, or 10 cents per share, which comfortably surpassed the Zacks Consensus Estimate of 5 cents.

Ulta is a beauty retailer that provides one-stop shopping for prestige, mass and salon products and salon services in the U.S. The company offers a full-service salon in all of its 333 retail stores across 38 states, and also distributes products through the company's website.

The Romeoville, Illinois-based retailer’s sales grew 9.8% year over year to $273.5 million, primarily driven by the addition of 50 new stores since the year-ago quarter. However, same-store sales fell 1.7% year over year, mainly due to a 3.9% decline in average ticket size, partially offset by a 2.2% rise in same-store traffic. During the quarter, the company opened 13 new stores, while total square footage expanded by 18%, compared to the same period last year.

Gross margin contracted 70 basis points (bps) year over year to 28.7%, mainly on account of fixed-store deleverage related to new stores, partially offset by cost reductions derived from improved supply chain.

Total operating expenses as a percentage of sales declined 150 bps to 25.0%, primarily due to lower selling, general and administrative costs and pre-launch expenses on account of management’s cost-saving efforts. Accordingly, operating income grew 42% year over year to $10.2 million, while operating margin rose 80 bps to 3.7%.

Ulta ended the quarter with merchandise inventories of $209.2 million, compared to $197 million at the end of the previous quarter caused by the addition of new stores. However, average inventory per store decreased 9.8% year-over-year due to better inventory management initiatives.

The company generated $69.9 million of cash from operations during the quarter and deployed $29.8 million towards capital expenditure, which resulted in free cash flow of $40.1 million.

Meanwhile, rival Sally Beauty Holdings Inc. (SBH - Snapshot Report) reported fiscal third-quarter earnings of 16 cents per share last month, edging past the Zacks Consensus Estimate by a penny. The company said that sales declined marginally by 0.5% year over year to $673.3 million primarily due to a negative foreign currency impact, which more than offset a 2.6% growth in same-store sales.

Looking ahead, Ulta plans to enhance market share during fiscal third-quarter through the launch of new brands, expanding its existing portfolio and by introducing a new salon service. The company expects earnings per share between 8 cents and 11 cents for the same quarter, on sales of $270 million to $278 million, in line with the Zacks Consensus Estimate of 9 cents.

For fiscal 2009, the company plans to open about 35 new stores and generate free cash flow of approximately $50 million. The Zacks Consensus Estimate on the company’s earnings for the year currently stands at 47 cents per share, which has moved up by 2 cents over the past week as 3 of 9 covering analysts raised expectations.

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