Ulta Salon, Cosmetics & Fragrance Inc. ( ULTA - Snapshot Report ) posted second quarter 2012 earnings of 54 cents per share, beating the Zacks Consensus Estimate of 51 cents per share. Quarterly earnings shot up 42.1% from the year-ago quarter earnings of 38 cents per share and were also ahead of management’s guided range of 49 cents–51 cents per share.

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

The salon operator reported net sales of $481.7 million in the second quarter, which climbed 22.1% year over year and were well above management’s projected range of $466 million–$473 million. The revenue upside was driven by growth in comps and unit expansion.

Quarter Highlight

Comparable store sales in the quarter escalated 9.7% from the prior-year level of 11.2% due to higher traffic. During the quarter, management succeeded in driving traffic based on leverage in value offerings, marketing initiatives, introduction of new products and 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.

Gross margin expanded 80 basis points (bps) year over year to 34.8% in the second 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 100 bps to 22.0%, as a result of margin improvement strategies.

In the reported quarter, operating income surged 44.9% year over year to $57.5 million, while the operating margin grew 180 bps to 11.9%.

Financial Position

Ulta ended the second quarter with cash and cash equivalents of $197.4 million and had no debt on its balance sheet.

Merchandise inventories at the end of the quarter stood at $316.7 million compared with $258.8 million at the end of the previous quarter. The increase was mainly attributable to the addition of 74 new stores since July 30, 2011 and opening of a distribution center in Chambersburg, Pennsylvania during the last quarter.

Store Update

Ulta opened 22 new stores in the quarter, thus bringing the total number of stores to 489. During the quarter, the company also added 50 boutiques selling Lancome cosmetics and 35 counters selling Clinique products. The company’s plan to open 100 stores in 2012 and remodel 21 stores reflects its strategy to continue focusing on store expansion.

Ulta remains on track to open 48 stores in the third quarter and 12 stores in the fourth quarter.

Outlook

In the third quarter of 2012, Ulta expects earnings per share between 54 cents to 56 cents, a significant growth from 42 cents in the year-earlier quarter. Net sales are estimated in the range of $494 million to $503 million based on a comparable store sales growth of 6% to 8%.

In 2012, the company expects to achieve comparable store sales growth of 8%, 300 basis points above the high end of its long term goal of 3% to 5% and earnings per share in the range of $2.58 to $2.60, including charges of 7 to 8 cents for accelerating store openings, the opening of a distribution center in Pennsylvania and planned expansion of prestige brand boutiques.

Our Take

The company ended the first half of 2012 on a great note and expects the same trend to continue through out the year aided by its 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 $2.60 and $3.23 per share, respectively.

Ulta which competes with Regis Corp. (RGS) has a Zacks #2 Rank, implying a short-term Buy rating on the stock. Our long-term recommendation for the stock remains Neutral