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Can Ulta Beauty's Strategies Continue to Keep Hurdles at Bay?

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Ulta Beauty, Inc. (ULTA - Free Report) is one of those few companies that has kept its robust surprise history intact even amid a tough retail landscape. While hurdles like consumers changing preferences and stiff competition from online giant Inc. (AMZN - Free Report) have plagued the entire retail space, Ulta Beauty’s superb growth endeavors have helped the company sail through these headwinds.  

So, let’s delve deeper into Ulta Beauty’s strategies and see if they can continue to help this Zacks Rank #3 (Hold) company keep up its solid show.

Omni-channel Strategy Remains a Major Growth Driver

Talking of Ulta Beauty’s growth initiatives, the company’s focus on omni-channel development takes the center stage. Apart from growing in-store sales, the company has been recording solid improvements at its online business. Notably, the company registered whopping 72.3% growth in e-commerce sales in second-quarter fiscal 2017, which reflects about 340 bps of the total comps growth recorded in the quarter. The increase in e-commerce sales was driven by traffic growth of 73% which included a 104% surge in mobile traffic. The superb e-commerce performance encouraged management to upgrade its fiscal 2017 e-commerce sales growth forecast to a range of 50-60% from around 50%.

Store Expansion on Track

Despite consumers’ shift to online shopping, Ulta Beauty remains keen on growing store base. Evidently, in the first half of the fiscal, the company opened 38 stores, while relocated and remodeled three and five stores, respectively. Further, the company plans to open 100 stores in fiscal 2017, including 50 openings planned for the third quarter.

Loyalty Program Woos Customers, Aids Top-Line Growth

Ulta Beauty’s loyalty program was one of the major sales driver in second-quarter fiscal 2017. Thanks to its excellent marketing and merchandising endeavors and in store conversions, Ulta Beauty grew its ultimate rewards members by 23% to 25.4 million by the end of July. Further, the company added 1.4 new members in the second quarter, which took its total new member count to 5 million in the past one year. Notably, this helped the company raise its market share in the beauty enthusiast space to 27%. Moreover, sales per member, average member ticket, retention rates and frequency of shopping remained sturdy. Management also stated that it expects its ultimate rewards credit card to contribute significantly to the top line in the fourth quarter of fiscal 2017.

Ulta Beauty Inc. Price and Consensus

Ulta Beauty Inc. Price and Consensus | Ulta Beauty Inc. Quote

These factors, along with impressive merchandise offerings helped Ulta Beauty deliver better-than-expected top- and bottom-line results consistently for over three years now. Evidently, second-quarter fiscal 2017 marked Ulta Beauty’s 15th straight quarter of earnings and sales beat. Encouraged by the sturdy results, management perked up its fiscal 2017 guidance, reflecting the company’s strong prospects. Moreover, Ulta Beauty boasts long-term earnings per share growth rate of 20%, which highlights its inherent strength.

Obstacles in Ulta Beauty’s Path — Will it Deter Growth?

However, it’s not that Ulta Beauty is completely immune to all industry hurdles. Though the company has been performing well, it remains vulnerable to the intense online competition owing to consumers’ evolving preferences. While Ulta Beauty’s comparable store sales (comps) grew in the last quarter, the rate of growth decelerated from the year-ago period, reflecting a slowing beauty market. Some analysts also believe that costs associated with efforts to grow online business could weigh upon Ulta Beauty’s margins. Additionally, the company’s limited brand awareness and challenges related to cheaper alternatives remain concerns for Ulta Beauty.

These hurdles have caused shares of this cosmetics retailer to slide 6.2% over a year. Nevertheless, it has performed better than the industry which tumbled 11.8% in the said time frame. So, let’s see if Ulta Beauty can continue to tide over the retail barriers with its sturdy growth ammunitions.

Looking for More Promising Bets? Check These Stocks from Ulta Beauty’s Space

Five Below, Inc. (FIVE - Free Report) has a solid earnings surprise history, with a long-term growth rate of 28.5%. Further, the stock boasts a Zacks Rank #2 (Buy).

Sally Beauty Holdings, Inc. (SBH - Free Report) , also carrying the same rank as Five Below has delivered back-to-back positive earnings surprises in the last two quarters.

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