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Why Is Ulta (ULTA) Down 12.9% Since Last Earnings Report?

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It has been about a month since the last earnings report for Ulta Beauty (ULTA - Free Report) . Shares have lost about 12.9% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Ulta due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Ulta Beauty Q3 Earnings Beat, Sales Meet Estimates

Ulta Beauty reported third-quarter fiscal 2018 results, wherein earnings outpaced estimates while revenues met the same. Further, the top and the bottom lines improved year over year. Management also issued guidance for the fiscal 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.

Q3 Numbers

Ulta Beauty’s earnings were $2.18 per share, which surpassed the Zacks Consensus Estimate by a couple of cents. Further, 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 effects from the adoption of the revenue standard, 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 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.

Other Financials

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 has 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.

Store Updates

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.

Guidance

Following the impressive quarterly results, management provided guidance for the fiscal fourth quarter and reiterated the same for fiscal 2018. Net sales are projected to be $2,085-$2,103 million 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 8.8% rise in fourth-quarter fiscal 2017.

Earnings per share for the ongoing quarter are envisioned to be $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.

For fiscal 2018, the company still expects total sales to grow in low teens’ percentage, with comps growth of 7-8%. Further, the company continues anticipating e-commerce sales rise in the 40% range. However, operating margin is still projected to decline by 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 expenditure incurred last year.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

Currently, Ulta has a strong Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. Notably, Ulta has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.




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