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Salon operator, Ulta Salon, Cosmetics & Fragrance Inc. (ULTA - Snapshot Report), posted third quarter fiscal 2012 earnings of 59 cents per share. The result surpassed the Zacks Consensus Estimate of 56 cents per share. Quarterly earnings spiked 40.5% from the year-ago quarter earnings of 42 cents per share and were also ahead of management’s guided range of 54 cents–56 cents per share.

Double-digit growth in top line and margin expansion led to the better-than–expected results.

The company reported net sales of $505.6 million in the third quarter, which jumped 22.4% year over year and were well above management’s projected range of $494 million to $503. The revenue upside was driven by growth in comps and unit expansion.

Quarter Highlights

Comparable store sales in the quarter escalated 8.4% from the prior-year level of 9.6% 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 its major product categories.

Gross margin enhanced 60 basis points (bps) year over year to 36.7% in the third 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 120 bps to 23.3% as a result of margin improvement strategies.

In the reported quarter, operating income surged 38.6% year over year to $61.3 million while operating margin grew 140 bps to 12.1%.

Financial Position

Ulta ended the third quarter with cash and cash equivalents of $191.7 million and had no debt on its balance sheet.

Merchandise inventories at the end of the quarter stood at $462.8 million compared with $354.9 million at the end of the previous quarter. The increase was mainly attributable to the addition of 95 new stores since October 29, 2011, and the opening of a distribution center in Chambersburg, Pennsylvania during the first quarter of 2012.

Store Update

Ulta opened 49 new stores in the quarter, thus bringing the total number of stores to 537. During the quarter, the company also added 79 boutiques selling Lancome cosmetics and 42 counters selling Clinique products. The company’s plan to open 101 stores in 2012 and remodel 21 stores reflects its strategy to continue focusing on store expansion.  In 2013, the company plans to unveil 125 stores.

Outlook

In the fourth quarter of fiscal 2012, Ulta expects earnings per share between 96 cents to 98 cents, significantly higher than 73 cents in the year-earlier quarter. Net sales are estimated in the range of $742 million to $754 million based on comparable store sales growth of 5% to 7%.

For fiscal 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 $2.64 to $2.66, including charges of 7 cents for accelerating store openings, the opening of a distribution center in Chambersburg and planned expansion of the prestige brand boutiques.

Our Take

The company expects to continue the uptrend 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 fiscal 2012 and 2013 are pegged at $2.61 and $3.30 per share, respectively.

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

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