Ulta Beauty, Inc. (ULTA - Free Report) reported third-quarter fiscal 2018 results wherein earnings outpaced estimates while revenues met the same. Further, both the top and the bottom line improved year over year. Management also issued guidance for the fourth quarter which was below analysts' expectations. Nevertheless, it reaffirmed fiscal 2018 outlook.
Quarterly results were driven by the company’s retail business, solid store-expansion efforts, gains from the adoption of revenue standard, higher market share gains and sturdy e-commerce sales and salon operations.
So far this year, the Zacks Rank #3 (Hold) stock has surged 30.9%, outperforming the industry’s 11.3% rally.
Ulta Beauty’s earnings came in at $2.18 per share, which exceeded the Zacks Consensus Estimate by a couple of cents. Also, the bottom line improved 28.2% year over year.
Net sales of this cosmetics retailer grew 16.2% year over year to $1,560 million but came in line with the Zacks Consensus Estimate. We note that Ulta Beauty adopted Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers on Feb 4, 2018. The adoption of this revenue standard contributed nearly $10.5 million to the top line in the reported quarter.
Comparable sales (comps) including stores and e-commerce climbed 7.8% compared with 10.3% growth in the prior-year quarter. Increase in traffic and ticket along with higher store productivity led to comps growth. During the fiscal third quarter, the company registered a transaction increase of 5.3% while average ticket was up 2.5%.
Retail business (comprising retail and salon) witnessed comps growth of 4.4% including 3.5% improvement in salon comps. Sales for the salon business rose 10.7% to $74 million. Further, e-commerce sales soared 42.5% to $170.7 million, reflecting about 340 basis points (bps) of total comps growth.
Gross profit increased 16.1% year over year to $572.3 million. However, gross margin remained flat at 36.7% as category and channel mix shifts along with investments in salon services and supply chain were completely offset by the impact from revenue recognition accounting and leverage in fixed store expenses. Including the effect from the revenue standard adoption, gross margin expanded 50 bps.
While operating income was up 4% year over year to $169.2 million, operating margin declined 130 bps to 10.8%. This contraction was due to a rise of 140 bps in SG&A expenses (as a percentage of sales), somewhat mitigated with lower pre-opening expenses, which decreased 21.6% to $7.6 million.
Ulta Beauty ended the quarter under review with cash and cash equivalents of $296.9 million and total stockholders’ equity of $1,835.7 million. Merchandise inventories summed $1,484.6 million as of Nov 3, 2018, marking a 10% increase from the year-ago period. However, average inventory per store remained flat year over year.
Net cash provided by operating activities came in at roughly $542.2 million in the first nine months of fiscal 2018.
In the fiscal third quarter, management bought back 451,424 shares for $119 million. Year to date, it repurchased 1,582,118 shares worth $379.4 million. With this, the company had nearly $282.8 million outstanding as of Nov 3, 2018 under its $625 million share repurchase plan announced in March this year.
In the fiscal third quarter, Ulta Beauty opened 42 stores while shuttered three. As of Nov 3, 2018, the company operated 1,163 stores, increasing its total square footage by 9.7% year over year.
Moving ahead, the company still plans to launch 100 stores and remodel or relocate 15 outlets in fiscal 2018.
Following the impressive quarterly results, management provided guidance for the fourth quarter and reiterated the same for fiscal 2018. Net sales are projected in the $2,085-$2,103 million band compared with $1,937.6 million registered in the prior-year quarter, which has a 53rd week. Comps including e-commerce sales are predicted to grow 7-8% compared with an 8.8% rise in fourth-quarter fiscal 2017.
Earnings per share for the ongoing quarter are envisioned in the range of $3.50-$3.55 compared with $3.40 in the fourth quarter of fiscal 2017, which included an impact of 14 cents from the 53rd week. The Zacks Consensus Estimate for the fiscal fourth quarter’s earnings stands higher at $3.60 which is likely to witness downward revisions in the coming days.
For fiscal 2018, the company still expects total sales to grow in low teens’ percentage with comps growth in the range of 7-8%. Further, the company continues anticipating e-commerce sales rise in the 40% range. However, operating margin is still projected to decline in the band of 50-70 bps.
Further, management continues to expect earnings per share to increase in the low 20% percentage range. The forecast includes nearly $500 million impact from share repurchases and estimates an effective tax rate of 24% for fiscal 2018.
Ulta Beauty still plans to spend about $375 million in fiscal 2018 compared with $441 million capital expenditures incurred last year.
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