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Ulta Beauty (ULTA) Up 19% in 3 Months on Strategic Efforts

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Ulta Beauty, Inc. (ULTA - Free Report) solid store-expansion efforts, adoption of new revenue standard, higher market share gains, sturdy e-commerce sales and salon operations bode well. Moreover, the company is on track with its loyalty program, which was one of the foremost sales growth drivers in second-quarter fiscal 2018. These efforts not only helped the company to deliver robust second-quarter results but also helped the stock to outpace the industry in the past three months. Evidently, this Zacks Rank #3 (Hold) stock has rallied approximately 19%, outperforming the industry’s and S&P 500 index’s growth of 9.7% and 7.6%, respectively.



Ulta Beauty has delivered earnings beat for more than three years now, except for fourth-quarter fiscal 2017. It also topped sales estimates in 17 of the last 19 quarters. The company’s mixed second-quarter fiscal 2018 results marked the continuation of positive earnings trend while sales missed estimates. Markedly, the stock gained 14.5% since the announcement of its quaterly results.

Let’s Introspect.

Loyalty Program: A Key Catalyst

Ulta Beauty’s loyalty program remains one of the key sales growth drivers. The company improved its Ultamate Rewards loyalty program to 29.5 million active members at the end of the reported quarter, up 15.5% year over year. This progress was fueled by the company’s excellent marketing and merchandising endeavors as well as improved store productivity and e-commerce. The momentum is likely to continue driven by addition of brands, maturation of loyalty members, gains from Platinum and Diamond Tiers besides higher penetration of the credit card program. Credit card, gift card and loyalty programs are expected to remain sturdy and boost the company’s revenues, thus driving the overall profitability.

Omni-channel & Other Initiatives on Track

Ulta Beauty is recognized for its strategy of striking the right balance between online and physical stores. In fact, the company has managed to grow both e-commerce and in-store sales. In second-quarter fiscal 2018, it registered e-commerce sales growth of 37.9%, reflecting about 250 bps of the total comps growth. This uptick was driven by about 40% rise in traffic and 50% growth in mobile traffic. For fiscal 2018, management anticipates e-commerce sales to grow in the 40% range.

Additionally, the company’s latest distribution center in Fresno, CA, has been serving e-commerce and retail operations. The distribution is expected to serve approximately 170 stores besides retaining its existing share of about 20% of e-commerce sales in the fall season.

Further, as part of its store expansion initiatives, Ulta Beauty opened 19 stores and closed two in the second quarter. It plans to open 100 stores and remodel or relocate 15 outlets in fiscal 2018, reaching its target of 1,400-1,700 stores in the United States in the near term.

Ulta Beauty also remains keen on enhancing beauty products offerings, while improving store traffic with superior services. The company has been witnessing sturdy growth in the brands like NARS, MAC, Clinique, Lancome, The Estée Lauder Companies Inc. (EL - Free Report) , Morphe and Chanel Beaute. These brand rollouts are likely to drive results in the second half of fiscal 2018. Also, the company announced its partnership with Kylie Cosmetics, which is expected to launch later in fiscal 2018.

Deterrents

Ulta Beauty has been grappling with soft margins for a while now. In the fiscal second quarter, operating margin declined 100 basis points. This is likely to continue in fiscal 2018 as per management’s operating margin guidance of a 50-70 bps decline, which might hurt profitability. The company issued lower-than-expected earnings outlook for the third quarter of fiscal 2018 as well.

2 Stocks to Watch

Office Depot, Inc. (ODP - Free Report) delivered an average positive earnings surprise of 9.8% in the trailing four quarters. The company sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Five Below, Inc. (FIVE - Free Report) pulled off an average positive earnings surprise of 14.8% in the trailing four quarters. It has a long-term earnings growth rate of 30% and a Zacks Rank #2 (Buy).

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