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Ulta Beauty Gains 8% YTD: Will the Rally Continue in 2019?

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Ulta Beauty, Inc. (ULTA - Free Report) is gaining investors’ confidence on the back of its omni-channel endeavors, strength in loyalty program and robust surprise history. Notably, the company outpaced earnings estimates for more than three years now except for fourth-quarter fiscal 2017. Moreover, it delivered sales beat in 17 out of the last 20 quarters.

Shares of this leading beauty retailer have advanced 8.1% so far in 2018, outperforming the industry’s 2.2% growth and the S&P 500’s 0.9% decline.

 



What’s Aiding the Rally?

Apart from a superb surprise trend, Ulta Beauty is known for its strategy of striking the right balance between online and physical stores. Amid the mounting online competition, Ulta Beauty managed to grow both e-commerce and in-store sales. Evidently, the company registered e-commerce sales growth of 42.5% in third-quarter fiscal 2018, which reflected about 340 basis points (bps) of the total comparable store sales growth. This was driven by about 36% rise in traffic and 44% growth in mobile traffic. For fiscal 2018, management anticipates e-commerce sales to grow in the 40% range.

Additionally, Ulta Beauty’s newest distribution center in Fresno, CA, is serving approximately 173 stores, besides improving its current share to about 21% of e-commerce orders. Further, the company opened 42 stores and closed three in the most recent quarter. In fiscal 2018, it plans to open about 100 stores and remodel or relocate 15.

Ulta Beauty is also significantly benefiting from its loyalty program, which was one of the major contributors to its top-line growth in third-quarter fiscal 2018. In fact, sales from the loyalty members represented nearly 95% of the company’s total revenues. Further, it increased its Ultamate Rewards loyalty program to 30.6 million active members at the end of the quarter, up 15.3% year over year. This was fueled by the company’s excellent marketing and merchandising endeavors as well as improved store productivity and e-commerce.

This momentum in the loyalty program is expected to continue in the months ahead, thanks to the addition of brands, maturation of loyalty members, gains from Platinum and Diamond Tiers, and higher penetration of the credit card program.

Furthermore, Ulta Beauty’s business model focused on “All Things Beauty, All in One Place” makes it a go-to destination for cosmetics and beauty product enthusiasts. The company remains keen on enhancing its beauty products offerings, hence, improving store traffic with superior services. Apparently, solid growth in prestige boutique brands, skin care, mass cosmetics and fragrance are boosting the company’s performance. Notably, its recent partnership with Kylie Cosmetics started off well and is expected to aid results in fiscal 2018.

All these initiatives are expected to drive the company’s top line and profitability in the months ahead.

Is There Any Concern?

Despite these positives, Ulta Beauty is grappling with soft operating margins mainly due to higher SG&A expenses. In third-quarter fiscal 2018, operating margin contracted 130 bps due to rise of 140 bps in SG&A expenses as a percentage of sales. However, this was partly compensated with a decline of 21.6% in pre-opening expenses. Management projects operating margin to decline 50-70 bps in fiscal 2018, which is a threat to the company’s profitability.

Bottom Line

We expect the company to overcome margin pressure on the back of its afore-mentioned growth strategies. Ulta Beauty’s Zacks Rank #3 (Hold), with an expected long-term earnings growth rate of 18.4% and Growth Score of A, further demonstrates its inherent potential.

Want Better-Ranked Retail Stocks? Check These

MarineMax, Inc. (HZO - Free Report) delivered a positive earnings surprise of 87.5% in the last reported quarter. It currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Abercrombie & Fitch Co. (ANF - Free Report) is also a Zacks Ranked #1 stock. It posted average positive earnings surprise of 88.6% in the trailing four quarters.

DICK’S Sporting Goods, Inc. (DKS - Free Report) delivered average positive earnings surprise of 25.5% in the last four quarters. Further, the company currently carries a Zacks Rank #2 (Buy).

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