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Ulta Beauty's (ULTA) Omnichannel Strength Aids, SG&A Costs Hurt

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Ulta Beauty, Inc. (ULTA - Free Report) has been benefiting from its robust omnichannel efforts and strength in all major categories, especially skincare. The company has created a robust niche in the beauty space due to its focus on key priorities.

These upsides have been working well for this Zacks Rank #3 (Hold) company amid high SG&A costs. Encouragingly, management raised its guidance for fiscal 2023 on its second-quarter earnings call. The Zacks Consensus Estimate for fiscal 2023 earnings per share (EPS) has risen 0.9% to $25.38 in the past 30 days.

Core Priorities Aid

The company’s foremost priority is to strengthen its omnichannel business and explore the potential of both physical and digital facets. ULTA has been undertaking various tools to enhance the experience of guests, like offering a virtual try-on tool and in-store education and reimagining fixtures, among others.

Thirdly, the company concentrates on offering customers a curated and exclusive range of beauty products through innovation. Moving on, Ulta Beauty is focused on deepening customer engagement by boosting rewards and loyalty programs. Fifthly, management is committed to optimizing its cost structure. Apart from these, the company strives to boost organizational talent and strengthen culture.

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Omnichannel, a Key Driver

Ulta Beauty is known for its strategy of striking the right balance between online and physical stores. The company’s buy online, pickup in store has been gaining traction for a while. Ulta Beauty has expanded the same-day delivery feature to all its stores, alongside enhancing its store fulfillment process to boost efficiency.

In fiscal 2022, the company launched its new alliance with Target and has 421 Ulta Beauty at Target shop-in-shop locations (as of the end of the second quarter of fiscal 2023). Also, ULTA is benefiting from its Wellness Shop launch (in the fourth quarter of fiscal 2021), which is a cross-category platform providing guests with self-care for the mind, body and spirit across several stores and online.  

The company’s initiatives to boost online promotions and customer engagement have also been supporting online sales growth. With consumers growing enthusiasm toward online sales, management remains on track with expanding capacity at fulfillment centers, the expansion of ship-from-store capabilities and curbside pickups.

Ulta Beauty is also benefiting from its mobile app and virtual try-on capabilities. That said, the majority of customers continue to transact only from the company’s stores. In the second quarter, Ulta Beauty introduced three new stores, remodeled three and relocated two. For fiscal 2023, management expects 25-30 net new stores, along with 20-30 store remodeling and relocation projects.

Skincare Stands Out

Ulta Beauty has been seeing market share gains in major beauty categories for a while now, with skincare standing out. The trend continued in the second quarter of fiscal 2023, wherein skincare was the company’s best-performing category.

The company saw double-digit growth in both mass and prestige. Results gained from newness in brands like Drunk Elephant, The Ordinary and Supergoop!, along with new brands like Bubble, Beautycounter and BYOMA. Guests’ increased focus on self-care and maintaining healthy skincare routines, along with the company’s focus on innovation, works well for the skincare category.

SG&A Costs to Remain High?

Ulta Beauty’s SG&A expenses have been rising year over year for a while now. In the second quarter of fiscal 2023, 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. 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. The operating margin decreased from 17% to 15.5% in the second quarter.

Management expects an operating margin between 14.6% and 14.8%, which 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.

What’s Ahead?

Ulta Beauty’s strong business model, diverse assortment and solid loyalty program helped drive splendid results and encouraged management to raise its fiscal 2023 view. Management 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. 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.

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.

Shares of Ulta Beauty have risen 1.1% in the past year against an equal decline of the industry.

Robust Retail Bets

Here, we have highlighted three better-ranked retail stocks.

Dillard's, Inc. (DDS - Free Report) , a department store retailer, currently sports a Zacks Rank #1 (Strong Buy). DDS has a trailing four-quarter negative earnings surprise of 77.1%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Dillard's third-quarter EPS has increased from $6.66 to $7.04 in the past 30 days.

Build-A-Bear Workshop, Inc. (BBW - Free Report) has a trailing four-quarter earnings surprise of 21.6%, on average. BBW, which is a multi-channel retailer of plush animals and related products, sports a Zacks Rank #1 at present.

The Zacks Consensus Estimate for Build-A-Bear Workshop’s current financial-year EPS suggests growth of 14.3% from the year-ago reported figure.

Ross Stores (ROST - Free Report) , an off-price retailer, currently carries a Zacks Rank #2 (Buy).

The Zacks Consensus Estimate for Ross Stores’ current financial-year EPS suggests growth of 19.4% from the year-ago reported figure. ROST has a trailing four-quarter earnings surprise of 11.4%, on average.

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