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Ulta Beauty Stock Skyrockets in a Year: Will Momentum Stay?

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Ulta Beauty, Inc. (ULTA - Free Report) has showcased a superb bull run in the past year, which can be largely attributable to its impressive surprise history. Notably, the company has outpaced earnings estimates for more than three years now, except for fourth-quarter fiscal 2017. Also, the company’s sales have surpassed estimates in 18 out of the last 21 quarters.

Driven by such a stellar record, shares of Ulta Beauty have surged 64.2% in the past year, crushing the industry’s growth of 33.8%. So, let’s take a look at the factors driving this renowned beauty retailer and see if it can sustain the robust momentum amid escalating expenses.

Factors Working in Ulta Beauty’s Favor

Ulta Beauty’s loyalty program was one of the major sales growth drivers in fourth-quarter fiscal 2018. Notably, the company’s Ultimate Rewards Loyalty program active members at the end of fiscal 2018 reached 31.8 million, up 14.4% year over year. This growth was fueled by strong marketing and merchandising endeavors as well as improved store traffic and productivity. Moreover, the credit card program surpassed expectations in fiscal 2018, backed by robust store associate engagement, acquisition campaigns, effective integration into the loyalty calendar and solid support from partners. The company is focused on personalization efforts through relevant product recommendations and replenishment to boost the loyalty program. These efforts are expected to drive the top and bottom lines.

Additionally, Ulta Beauty is known for its strategy of striking the right balance between stores and online. Amid the rising online competition, the company has managed to increase both e-commerce and in-store sales. Notably, the company registered e-commerce sales growth of 25.1% in the fourth quarter of fiscal 2018, driven by a rise in total site traffic with improved mobile site traffic and mobile app traffic. For fiscal 2019, management anticipates e-commerce sales growth of 20-30%. With respect to store fleet, the company plans to open nearly 80, remodel 12 and relocate 8 stores in fiscal 2019.

Ulta Beauty has created a niche market for its beauty products on the back of solid mix. The company’s stores are a one-stop shop for beauty enthusiasts, featuring prestige and discount beauty brands, and offering salon products and services. Further, the company is keen on enhancing beauty products offerings, while also improving store traffic with superior services. Also, the company’s initiative to the partner with brands like Morphe and Kylie is delivering impressive results and driving traffic. These brands are expected to aid results in fiscal 2019. Brand launches and rollouts will continue to drive the company’s top line, thereby generating higher profitability.

Will Momentum Sustain?

The company has been grappling with soft operating margins for the past few quarters now. Though operating margin improved in the fourth quarter, management expects modest deleverage in the metric in the first half of fiscal 2019. Further, SG&A expenses are projected to escalate, owing to higher store labor, and increased spending in growth initiatives and innovation. Further, higher costs of investments toward digital channels, salon services, infrastructure, personalization efforts, brands and initiatives to enhance customer experience are likely to result in higher corporate overheads. This might weigh on the operating margin and affect the company’s overall profitability.

Nevertheless, we expect the aforementioned growth drivers to help this Zacks Rank #3 (Hold) company offset these hurdles and continue with its solid growth story. This also gets reconfirmed by management’s upbeat guidance for fiscal 2019, wherein total sales are projected to see a low-double-digit percentage rate, with comps increase of nearly 6-7%. The company envisions earnings per share in fiscal 2019 to be $12.65-$12.85, up from adjusted earnings of $10.85 per share in fiscal 2018.

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