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Ulta Beauty Soars on Earnings Beat

After the closing bell on Thursday, Ulta Beauty Inc (NASDAQ:ULTA) issued financial results for its third quarter of fiscal 2019 ended on Nov. 2.

Following this, shares of the Bolingbrook, Illinois-based operator of beauty stores soared 9.31% to a price of $257.99 per unit in extended trading.

Ulta Beauty posted adjusted earnings per share of $2.23, which was a 3.2% increase from the prior-year quarter, on net sales of $1.68 billion. The top line grew 7.7% year over year, but it fell $10 million short of expectations.


In a statement, CEO Mary Dillon commented on third-quarter results:


"Our differentiated model is winning in the marketplace. The Ulta Beauty team delivered another quarter of solid top-line performance, gross margin expansion, and EPS growth, despite the current challenges facing the U.S. cosmetics category. We continue to gain market share across all major beauty categories, and we are extending our leadership position by creating stronger connections with our guests and engaging with them in better and more exciting ways."



The gross profit margin rate gained 40 basis points to 37.1% of total net sales in the third quarter of fiscal 2019, up from 36.7% in the third quarter of fiscal 2018, as a result of successful strategies of marketing and merchandising implemented during the quarter. The sustainment of fixed store costs produced a positive leverage effect, which also helped the gross margin.

In contrast to net sales, margins and earnings increases, the same-store sales growth rate dropped 460 basis points to 3.2% in the third quarter of fiscal 2019, down from 7.8% in the same quarter of fiscal 2018. It signaled that a 2.3% gain in transactions and a 0.9% rise in the average price ticket have not been enough to beat the year-ago gross margin rate. (Note: same-store sales include e-commerce sales.)

In the quarter, Ulta Beauty operated 1,241 stores, up 6.9% from the previous year.

Looking ahead to full fiscal 2019, Ulta Beauty projects a 10% growth in total net sales up to approximately $7.4 billion versus analysts' expectations of $7.44 billion. The specialty retailer aims to open 80 new stores and to achieve 4.7-5% growth in same-store sales. Also, Ulta Beauty has narrowed its outlook on adjusted earnings per share to a range of $11.93 to $12.03 from the previous range of $11.86 to $12.06 versus consensus estimates of $11.93 for full fiscal 2019. The company has budgeted $305-$315 million for capital expenditures.

Third-quarter activities absorbed more financial resources than what they put in. Ulta Beauty reported operating cash inflows of $557.5 million, up 2.8% from last year, against cash outflows of a bit over $790 million. The beauty retailer allocated funds as follows: 64% to common share repurchase programs and 36% to property and equipment purchases and equity investments.

Thus, the balance sheet closed the third quarter of fiscal 2019 with nearly $209 million in cash on hand and equivalents, down 50% from the beginning of the quarter. Further, total merchandise inventories were valued at $1.62 billion while property and equipment were valued at $1.23 billion. Total debt was $1.93 billion in operating lease liabilities and the resulting total equity was worth $1.85 billion.

Regarding Ulta Beauty on the Nasdaq, the stock price fell 4% so far this year to below the 120-day simple moving average line. The share price of $236.02 at close on Thursday was also slightly underneath the 70- and 30-day SMA lines.

The stock has a market capitalization of around $13.9 billion. The company has stopped paying a dividend as of May 15, 2012, when the last payment was made.

Wall Street sell-side analysts recommend an overweight rating for shares of Ulta Beauty, implying an expectation that the stock will provide good value for investors over the next 52 weeks. Analysts set a price target for Ulta Beauty of approximately $279.91 per share, representing a 18.6% increase from Thursday's closing price.

Disclosure: I have no positions in any security mentioned.

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This article first appeared on GuruFocus.