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Will Ulta Beauty's (ULTA) Efforts Aid Earnings Beat in Q1?

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Ulta Beauty, Inc. (ULTA - Free Report) is slated to release first-quarter fiscal 2018 earnings on May 31, after the closing bell. The company has a robust earnings history, having delivered positive earnings surprises for more than three years. However, it broke the trend in the last reported quarter with a negative earnings surprise of 0.7%.

Nevertheless, the Zacks Consensus Estimate of $2.48 for the first quarter increased by a penny in the last seven days and reflects a year-over-year improvement of 29.8%. Management envisions earnings per share within $2.43-$2.48 for the quarter.

Price, Consensus and EPS Surprise

Price, Consensus and EPS Surprise | Quote

So let’s see how things are shaping up prior to the earnings announcement.

Factors Influencing 1Q18

Ulta Beauty’s effective marketing initiatives, sturdy e-commerce business, superb salon operations and strength in prestige cosmetics bode well. Notably, Ulta Beauty recorded 60.4% growth in e-commerce sales in last reported quarter, which helped it to stand out amid intense online competition. Additionally, favorable traffic is driving its comparable store sales (comps) growth. Further, the company has been gaining from enhanced market share gains and benefits from loyalty program, which have been significantly contributing to its results. These are likely to prove conducive to the company’s upcoming quarterly results.

These initiatives have also aided the stock to outperform the industry in the last three months. The stock has returned 27.2%, while the industry gained 2.8%.

For first-quarter fiscal 2018, management anticipates net sales in the $1,506-$1,519 million band. Comps, including e-commerce sales, are predicted to grow 6-7%.

Notably, analysts surveyed by Zacks expect revenues for the first quarter to come in at $1,525 million, up nearly 16% from the year-ago period. Further, the consensus estimate for salon business’ revenues is pegged at $80 million, up 8.5% from fourth-quarter fiscal 2017.

However, Ulta Beauty has been grappling with soft margins for a while now. The company witnessed contraction of both gross and operating margins in the fiscal fourth quarter. Gross profit margin contracted 50 basis points due to deleveraged merchandise margins and one-time bonus payment with respect to tax reforms. Higher SG&A expenses along with lower gross margin led to the decline in operating margin.

Further, the company is exposed to risk in the customer-driven industry as cheaper alternatives might deter buyers’ loyalty for the brand, consequently impacting the sale of products under Ulta banner.

Zacks Model

Our proven model shows that Ulta Beauty is likely to beat estimates this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Ulta Beauty’s Earnings ESP of +0.46% and a Zacks Rank #2, make us confident about an earnings surprise.

Other Stocks With Favorable Combination

Here are some companies you may want to consider as our model shows that these too have the right combination of elements to post an earnings beat:

Dollar General Corporation (DG - Free Report) has an Earnings ESP of +1.97% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

PVH Corp. (PVH - Free Report) has an Earnings ESP of +0.56% and a Zacks Rank of 2.

Dollar Tree, Inc. (DLTR - Free Report) has an Earnings ESP of +0.20% and a Zacks Rank #3.

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