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Has Ulta Beauty Hit a Slowdown Point?

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On Friday, shares of Ulta Beauty Inc. (ULTA - Free Report) are falling, down over 8% in afternoon trading on the heels of the company’s second-quarter fiscal 2017 earnings report.

At first glance, Ulta delivered strong results, reporting earnings of $1.83 per share and revenues of $1.29 billion. Both the top and bottom lines beat the Zacks Consensus Estimate, and growing 20.6% and 27.9%, respectively. Comparable store sales grew 11.7%, while e-commerce sales increased an incredible 72.3% during the quarter.

The beauty giant, as a result, raised part of its guidance for fiscal 2017. Ulta now expects comps growth, including e-commerce, in the range of 10-11%, up from previous projections of 9-11%. The company also boosted its outlook for online sales growth, in addition to opening 100 net new stores.

But if you take a closer look, Ulta’s results were perhaps not as positive as they first seemed. While revenues came in ahead of estimates, the beat was marginal. Comps growth, though impressive, was down from the 14.4% increase in the year-ago period. Ulta’s forecast, while matching analysts’ expectations, seemed to be a little less than what investors expected.

Reaction today has been harsh, both from investors and from analysts. BMO Capital Markets downgraded ULTA stock to market perform from outperform. Citing an overall beauty market, BMO analysts said that while Ulta has many advantages to its names, like strong digital presence and a popular rewards program, there will be challenges ahead for the beauty retailer.

Competition, they said, is heating up, everywhere from department stores becoming more promotional with their beauty departments, (AMZN - Free Report) potentially partnering with prestige beauty site Violet Grey, and Macy’s (M - Free Report) leveraging its Bluemercuy acquisition. Analyst Shannon Coyne believes Ulta will see its “competitive moat recede over the next 12-to-24 months.”

Ulta In-Depth

ULTA is currently a #3 (Hold) on the Zacks Rank, with a VGM score of ‘A.’ Year-to-date, the stock is down nearly 9%, and has fallen almost 14% over the past 12 months.

There’s no denying that Ulta has suffered recently as the beauty market evolves, with investors growing concerned that the company can keep up its tremendous growth streak. But what we have to remember is that as a retail, brick-and-mortar business, Ulta will mature at some point, and comparable store sales growth should be expected to come in lower eventually.

On the other hand, Ulta’s digital sales are booming. In addition to over 70% growth in e-commerce sales, online traffic was up 73%, while mobile traffic was up 104% thanks to investments in digital marketing, pay channels—think pay search affiliate display re-targeting—and paid social, including Facebook (FB - Free Report) , Twitter (TWTR - Free Report) , and YouTube (GOOGL - Free Report) . And through Ulta’s app, traffic surged 450% year-over-year, with 41 million visits during the quarter.

GlobalData Retail analyst Anthony Riva points out that “online margins are reasonably strong and the gap with physical is much smaller than it is for many other retailers…This means online growth makes a steady contribution to the bottom line,” he said in a note emailed to Retail Dive.

Ulta is still one of the best retailers out there, and while this latest earnings report showed some minor hiccups, the company is still leaps and bounds ahead of the competition. With an incredible online initiative combined with products that deeply resonate with customers, Ulta will likely continue to be a leader in the beauty industry for a long time.

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