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Ulta Beauty Down 36% in 3 Months: SG&A Costs on the Rise

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Ulta Beauty, Inc. (ULTA - Free Report) is losing sheen, as it is grappling with challenges like escalated selling, general and administrative (SG&A) expenses, which are hurting its operating margin. This along with challenges in the U.S. cosmetics space prompted management to lower its fiscal 2019 guidance when it reported second-quarter results.

These factors are clearly playing on investors’ sentiments, as this Zacks Rank #4 (Sell) stock has crashed 36% in the past three months, wider than the industry’s decline of nearly 15%. Moreover, the Zacks Consensus Estimate for the third quarter and fiscal 2019 have moved south over the past 30 days from $2.63 to $2.16 and $12.95 to $11.96, respectively.

That said, let’s delve deeper into the factors that have put Ulta Beauty in a bad shape.

Ulta Beauty in Doldrums

Ulta Beauty has been struggling with rising SG&A expenses for a while. This may negatively impact the company’s operating margin. Notably, the operating margin contracted 50 bps to 12.5% during the second quarter of fiscal 2019. A rise of 90 bps in SG&A expenses as a percentage of sales negatively impacted the operating margin performance during the quarter.

Further, the company expects operating margin deleverage of 60-70 bps for fiscal 2019 compared with the prior guidance of leverage of 10-20 bps. For third-quarter fiscal 2019, Ulta Beauty expects higher SG&A costs. The company’s expenses are usually toward increasing store labor and greater spending on growth initiatives and innovation.

Further, higher costs of investments toward digital channels, salon services, infrastructure, personalization efforts, brands and initiatives to enhance customer experience result in higher corporate overheads. In fact, we noted that deleveraging due to investments in salon services was a deterrent for the gross margin in the second quarter, wherein both top and bottom lines missed the Zacks Consensus Estimate.

This apart, management is seeing certain headwinds and uncertainty in the U.S. cosmetics market. The company stated that growth in the makeup business was decelerating for two years, and is now negative. Further, management revealed that based on certain tracked data, the overall U.S. cosmetics market witnessed mid-single-digit declines during the first half of 2019, with more volatility of late.

All these factors prompted management to cut its view for fiscal 2019. For the fiscal, management now projects total sales to increase 9-12% compared with the previous guidance of growth in the low-double-digits percentage range. Further, earnings per share are now envisioned to be $11.86-$12.06. Earlier, the company projected earnings of $12.83-$13.03 per share.

Although we commend Ulta Beauty’s growth efforts like strong Loyalty Program and omnichannel strategies, among others, it is yet to be seen if these can help this beauty retailer come out of the dark. Until then, investors can count on other better-ranked retail stocks, which appear promising.

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