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Ulta Beauty (ULTA) Declines Despite Q4 Earnings & Sales Beat

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Ulta Beauty, Inc. (ULTA - Free Report) posted fourth-quarter fiscal 2019 results, wherein both top and bottom lines improved year over year and beat the Zacks Consensus Estimate. Results met the high end of management’s expectations and were backed by improved omnichannel capacity along with the company’s unique merchandise and efficient marketing. This helped the beauty retailer expand market share in all major beauty categories, with skincare recording the highest growth.

However, the U.S. makeup category remained troubled across the prestige as well as mass beauty channels. In fact, management expects this category to remain challenged in 2020. Further, the company expects operating margin to decline in fiscal 2020. Management expects the first half of 2020 to be more challenged than the second half. It also provided softer-than-expected earnings guidance for the fiscal. Incidentally, earnings per share are envisioned to be $12.55-$12.75 while the consensus mark stands at $13.13.

Shares of the company dipped 1.8% during the after-market trading session on Mar 12. This Zacks Rank #3 (Hold) stock has lost 20.3% over the past three months compared with the industry’s decline of 19.9%.

Q4 Numbers

Ulta Beauty’s adjusted earnings came in at $3.83 per share, which increased 6.1% from $3.61 reported in the year-ago period. Also, adjusted earnings surpassed the Zacks Consensus Estimate of $3.72. This excluded gains from federal income tax credits of 6 cents. The year-over-year rise in the bottom line can be attributable to improved sales and gross margin.

Ulta Beauty Inc. Price, Consensus and EPS Surprise

Ulta Beauty Inc. Price, Consensus and EPS Surprise

Ulta Beauty Inc. price-consensus-eps-surprise-chart | Ulta Beauty Inc. Quote

Net sales of this cosmetics retailer grew 8.5% year over year to $2,305.9 million and beat the Zacks Consensus Estimate of $2,293 million. Comparable sales or comps (including stores and e-commerce) climbed 4% compared with 9.4% growth recorded in the prior-year quarter and 3.2% in the preceding quarter. Increased transactions and average ticket led to the upside. During the third quarter, the company registered a transaction increase of 1.8%, while the average ticket grew 2.2%.

Gross margin expanded 10 basis points (bps) to 35%, backed by higher merchandise margins stemming from impressive marketing and merchandising strategies. This was somewhat offset by impacts from investments in salon services.

However, operating margin contracted 70 bps to 12.5% as higher gross margin was offset by a 90-bp rise in SG&A expenses (as a percentage of sales). Pre-opening expenses grew 50% to $3.6 million.

Other Financials

Ulta Beauty ended the quarter with cash and cash equivalents of $392.3 million and total stockholders’ equity of $1,902.1 million. Net merchandise inventories summed $1,293.7 million at the end of fiscal 2019, increasing 6.5% from the year-ago period. Average inventory per store remained flat year over year.

Net cash provided by operating activities was $1,101.3 million in fiscal 2019.

Ulta Beauty bought back 681,458 shares for $174.1 million in the reported quarter. In fiscal 2019, the company repurchased 2,320,896 shares for $681 million. After this, the company had shares worth $214.6 million outstanding, as of Feb 1, 2020, under its $875-million share repurchase plan announced in March 2019. On Mar 10, 2020, management authorized a new buyback plan of $1.6 billion, which will replace the March 2019 program. Notably, the company has made buybacks worth $2.2 billion since 2014.

Store Updates

During the fourth quarter, Ulta Beauty opened 13 stores and relocated two. In fiscal 2019, the company opened nearly 86 stores, remodeled 12 and relocated eight. The company ended the fiscal with 1,254 stores. In fiscal 2020, the company intends to open about 75 stores, remodel or relocate roughly 15 and refresh nearly 42.

Guidance

The company’s omnichannel moves are on track. E-commerce sales rose in strong double digits in fiscal 2019. During the fiscal, the company concluded the rollout of the buy online, pickup in store initiative across all stores; refreshed its mobile app and introduced “Afterpay” to ease online purchases.

For fiscal 2020, management projects total sales to increase 7-8%. Comps are expected to rise 3-4%. The company expects an operating margin deleverage of 70-80 bps for fiscal 2020.

Markedly, Ulta Beauty’s earnings guidance includes the impact of share repurchases worth roughly $1.3 billion and an effective tax rate of 24-24.5%.

The company plans capital expenditures of $280-$300 million for fiscal 2020, wherein net interest expenses are expected to be about $9 million.

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