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Ulta Beauty (ULTA) Q2 Earnings Top Estimates, Sales Miss

Zacks Equity Research
·6 min read

Ulta Beauty, Inc. ULTA posted second-quarter fiscal 2020 results, with the top and the bottom line declining year over year. Also, sales missed the Zacks Consensus Estimate. Results were affected by coronavirus-led store closures. However, the company started reopening stores during the quarter, with Shop Safe standards. Also, it is witnessing improved trends.

Incidentally, comparable sales or comps improved considerably as the quarter progressed. The metric that declined 37% in May, dropped just 10% in July as stores had reopened. In the first three weeks of August, comps were down in mid-single digits that indicates continued sales improvement. The company expects the near-term landscape to remain dynamic and troubled, and it did not offer any earnings guidance at this juncture.

Q2 Numbers

Ulta Beauty posted adjusted earnings per share of 73 cents, compared with earnings of $2.72 reported in the year-ago quarter. Nevertheless, the bottom line came much ahead of the Zacks Consensus Estimate of 10 cents.

Ulta Beauty Inc. Price, Consensus and EPS Surprise

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 beauty retailer slumped 26.3% year over year to $1228 million and missed the Zacks Consensus Estimate of $1,236 million. Sales were hurt by coronavirus-led store closures. Comparable sales or comps (including stores temporarily closed due to the pandemic and e-commerce sales) plummeted 26.7% against 6.2% growth recorded in the prior-year quarter. During the quarter under review, the company registered a transaction decline of 36.2%, partly made up by a rise in average ticket of 14.9%.

Gross margin collapsed from 36.4% to 26.8% due to fixed store cost deleverage on reduced sales, unfavorable channel mix shifts, greater inventory reserves and deleverage of salon costs due to lower sales. This was somewhat offset by reduced promotions.

Operating income fell considerably from $208 million to $12.8 million, with the operating margin contracting from 12.5% to 1.1% in the second quarter. Adjusted operating income came in at $54.9 million and the respective margin was 4.5%. Notably, SG&A expenses (as a percentage of sales) declined from 23.6% to 22.1%, courtesy of reduced store payroll and benefits as well as lower marketing costs. This was partly negated by deleverage stemming from lower sales due to COVID-19 and higher costs associated with growth-related investments.

Other Financials

Ulta Beauty ended the quarter with cash and cash equivalents of $1,157.3 million and total stockholders’ equity of $1,770.8 million. Net merchandise inventories summed $1,368.5 million at the end of the quarter. Average inventory per store fell slightly year over year. Net cash from operating activities was $15,989 million in the 26 weeks ended Aug 1, 2020.

The company now anticipates spending $180-$200 million as capital expenditure in fiscal 2020 compared with the previous guidance of $200-$210 million.

Update on COVID-19

Ulta Beauty had temporarily closed all stores on Mar 19, though it kept its important online operations active. Further, the company introduced curbside pickup in certain stores on Apr 19 and started a phased store reopening process on May 11. By Jul 20, the company’s entire store fleet was operational. As of Aug 1, salon services were available in about 88% stores, with brow services offered in nearly 85% stores. Notably, management has reactivated about 17,000 furloughed workers. 

The company is on track with undertaking actions to manage its business amid the pandemic. To this end, it has reopened stores with limited capacity and reduced hours to maintain social distancing. Also, it has implemented Shop Safe standards across all stores. The company resumed new store openings in August. Further, it is accelerating the opening of Jacksonville fast fulfillment facility; raising order processing capacity in the current distribution centers; extending ship-from-store capacity to another 100 stores to support continued strength in e-commerce sales. Markedly, sales from e-commerce operations soared more than 200% in the second quarter.

Ulta Beauty incurred additional COVID-19 related costs of about $135 million in the first six months of fiscal 2020. It expects to incur costs in the range of $35-$40 million in the second half of fiscal 2020 toward PPE and costs related to COVID-19. However, the company has been curtailing payroll, variable store costs, marketing expenses, and corporate overhead costs.

Store Updates

During the quarter, new store openings were temporarily paused owing to the pandemic. Ulta Beauty ended the second quarter with 1,264 stores. During the quarter, management unveiled plans to permanently shut down 19 stores that are likely to occur in the third quarter. In fiscal 2020, the company anticipates opening about 30 new stores and relocating five. While fiscal 2021 plans are not finalized yet, management anticipates opening at least 30 new stores, though the plans will continue to be assessed according to the economic conditions and costs among other factors.

Shares of this Zacks Rank #3 (Hold) company have dropped 8.2% in the past three months against the industry’s growth of 16.2%.

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