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Factors Setting the Tone for Ulta Beauty's (ULTA) Q3 Earnings

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Ulta Beauty, Inc. (ULTA - Free Report) is slated to release third-quarter fiscal 2018 earnings on Dec 6, after the closing bell.

Notably, the company has outpaced the earnings estimates for more than three years now, except in the fourth quarter of fiscal 2017. Also, it delivered an average four-quarter positive earnings surprise of 2.4%. Further, the company recorded sales beat in 17 of the trailing 19 quarters.

Robust earnings and sales surprise trend aided the stock to outperform the industry in a year. Shares of Ulta Beauty have surged 33.1% compared with the industry’s 16.8% rally.

What to Expect?

The Zacks Consensus Estimate for third-quarter earnings is pegged at $2.16, reflecting 27.1% growth year over year. Notably, estimates have witnessed an upward revision over the past 30 days. The consensus estimate for quarterly sales stands at $1,560 million, up about 16% from the figure registered in the year-ago period.

Recently, Ulta Beauty released its preliminary comparable store sales (comps) results for third-quarter fiscal 2018 and updated the earnings forecast. Comps improved 7.8% (including e-commerce) compared with a 10.3% increase in the prior-year quarter. The uptick was primarily driven by improved transactions. Retail comps were up 4.4% with salon comps improving 3.3%. Also, e-commerce sales rose 42.2%.

Management now envisions earnings per share for the fiscal third quarter at the higher end of its previous guidance range of $2.11-$2.16. Ulta Beauty had earlier projected net sales of $1,550-$1,563 million for the to-be-reported quarter.

Ulta Beauty Inc. Price, Consensus and EPS Surprise

Ulta Beauty Inc. Price, Consensus and EPS Surprise | Ulta Beauty Inc. Quote

Factors Likely to Influence 3Q18

Ulta Beauty is consistently benefiting from its loyalty program, unique merchandise offerings and robust omni-channel endeavors. Solid marketing and store-growth initiatives, comps growth, enhanced market share and continued progress on salon operations are also contributing to the company’s performance.

This apart, the company strives to strike the right balance between online and physical stores. Notably, it has been gaining from higher footfall, including mobile traffic. Ulta Beauty’s latest distribution center in Fresno, CA, has been serving e-commerce and retail operations. In fiscal 2018, the company plans to open 100 stores and remodel or relocate 15 outlets.

The company’s loyalty program is one of the major sales growth drivers. This program will continue gaining momentum, courtesy of the addition of brands, maturation of loyalty members, gains from Platinum and Diamond Tiers beside higher penetration of the credit card program. Also, credit card, gift card and loyalty programs are expected to remain sturdy.

Further, Ulta Beauty has a strong mix of beauty products. The company’s stores are a one-stop shop for beauty enthusiasts, featuring prestige and discount beauty brands, and offering salon products and services, all under one roof.

All these initiatives are expected to drive the company’s top and bottom lines in the to-be-reported quarter.

However, Ulta Beauty is grappling with soft operating margins due to higher SG&A expenses. In fiscal 2018, management projects operating margin to contract 50-70 basis points, which might dent the company’s profitability.

Zacks Model

Our proven model does not conclusively show that Ulta Beauty is likely to beat estimates in third-quarter fiscal 2018. 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 has Earnings ESP of -0.04% and a Zacks Rank #3. Though the company’s favorable rank increases the predictive power of ESP, we need to have a positive ESP to be confident about an earnings surprise.

Stocks Poised to Beat Earnings Estimates

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

lululemon athletica inc. (LULU - Free Report) has an Earnings ESP of +1.87% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Costco Wholesale Corp. (COST - Free Report) has an Earnings ESP of +3.09% and a Zacks Rank #3.

The Michaels Companies, Inc. (MIK - Free Report) has an Earnings ESP of +2.86% and a Zacks Rank #3.

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