Ulta Beats by a Penny

Ulta Salon, Cosmetics & Fragrance Inc. (ULTA - Snapshot Report) posted first quarter 2012 earnings of 54 cents per share, edging out the Zacks Consensus Estimate by a penny. Quarterly earnings shot up 45.9% from the year-ago quarter earnings of 37 cents per share and were also ahead of management’s guided range of 46 cents - 48 cents per share.

The better-than-expected results were due to double-digit growth in the top line and margin expansion.

The salon operator reported net sales of $474.1 million in the first quarter, up 22.8% year over year and were well above management’s projected range of $452 million-$460 million. The revenue upside was driven by double-digit growth in comps and unit expansion.

Quarter Highlight

Comparable store sales in the quarter escalated 10.1% from the prior-year level of 11.1% due to higher traffic. During the quarter, management succeeded in driving traffic based on leverage in value offerings, marketing initiatives, introduction of new brands and customer service and expects the same trend to continue going forward. The beauty retailer also benefited from continued demand across all its categories and unit expansion.

Gross margin expanded 110 basis points (bps) year over year to 36.0% in the first quarter, mainly attributable to leverage from solid comps and continued enhancement in merchandise margin.

Selling, general and administrative expenses, as a percentage of sales, slipped 110 bps to 23.4% during the quarter, thanks to margin improvement strategies.

In the reported quarter, operating income surged 47.1% year over year to $57.4 million, while the operating margin grew 200 bps to 12.1%.

Financial Position

Ulta ended the first quarter with cash and cash equivalents of $266.3 million and had no debt on its balance sheet.

Merchandise inventories at the end of the quarter stood at $332.1 million compared with $255.5 million at the end of the previous quarter. The increase was mainly attributable to the addition of 73 new stores since April 30, 2011.

Store Update

Ulta opened 18 new stores in the quarter, thus bringing the total number of stores to 467. During the first quarter, company also opened its third distribution center in Chambersburg, Pennsylvania. The company will continue to focus on store expansion and hence, plans to open 100 stores in 2012 and remodel 21 stores.

Ulta currently expects to open 22 stores in the second quarter, 48 stores in the third quarter and 12 stores in the fourth quarter.

Outlook

In the second quarter of 2012, Ulta expects earnings per share between 49 cents to 51 cents, a significant growth from 38 cents in the year-earlier quarter. Net sales are estimated in the range of $466 million to $473 million based on a comparable store sales growth of 6% to 8%.

In 2012, the company expects to achieve comparable store sales growth 200 to 300 basis points above the high end of its long term goal of 3% to 5% and net income growth also more than its long term target of 25% - 30%.

Our Take

The company has started 2012 on a great note and expects the same trend to continue through out the year aided by it’s five point strategy of accelerating store growth, introducing guests to new brands, products, and services, enhancing loyalty program, broadening marketing reach and increasing focus on Ulta.com. Hence, we expect an upward movement in estimates in the coming days. The Zacks Consensus Estimates for 2012 and 2013 are pegged at $2.54 and $3.19 per share, respectively.

Ulta which competes with Regis Corp. (RGS - Analyst Report) has a Zacks #1 Rank, implying a short-term Strong Buy rating on the stock. Our long-term recommendation for the stock remains Outperform.