Ulta Beauty (ULTA) Q3 Earnings Top Estimates, Sales Down Y/Y
Shares of Ulta Beauty, Inc. ULTA declined 3.6% in the after-market trading session on Dec 3, after it released third-quarter fiscal 2020 results. Although earnings beat the Zacks Consensus Estimate, both top and bottom lines decreased year over year, reflecting continued impacts of the pandemic.
The company began the fourth quarter with roughly all stores open for retail. However, management warned that owing to the resurgence in coronavirus cases, market-specific government limitations may increase, leading to lower operating hours, restrictions on in-store capacity and mandatory store closures in a few cases. While the company remains well placed for the holiday season and is encouraged with the early holiday sales trends in November, the operating landscape remains dynamic. For the fourth quarter, management expects comparable store sales to decrease 12-14%.
Notably, management remains encouraged about its planned partnership with Target TGT in 2021. The company said that it plans to introduce Ulta Beauty at Target next fall, which will be a shop-in-shop experience online as well as in certain Target locations.
Quarterly Numbers
Ulta Beauty posted adjusted earnings per share of $1.64 compared with $2.23 reported in the year-ago quarter. Nevertheless, the bottom line surpassed the Zacks Consensus Estimate of $1.51 per share.
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 decreased 7.8% year over year to $1,552 million. The Zacks Consensus Estimate stood at $1,547 million. Sales were hurt by the impact of coronavirus. Comparable sales or comps (including stores temporarily closed due to the pandemic and e-commerce sales) fell 8.9% against 3.2% growth recorded in the prior-year quarter. During the quarter under review, the company registered a transaction decline of 15.4%, partly made up by a rise of 7.6% in average ticket.
Gross profit dropped 12.5% to $545.5 million and the gross margin collapsed from 37.1% to 35.1% due to fixed store cost deleverage on reduced sales and unfavorable channel mix shifts. This was somewhat offset by improved merchandise margins stemming from reduced promotions.
SG&A expenses fell 7.3% to $416.4 million, courtesy of reduced store payroll and benefits, store expenses, and marketing costs, somewhat negated by elevated corporate overhead costs, and personal protective equipment (PPE) and COVID-related costs. SG&A expenses (as a percentage of sales) escalated 10 basis points to 26.8% due to reduced sales as a result of the pandemic.
Operating income fell from $167.8 million to $101.3 million, with the operating margin contracting from 10% to 6.5% in the quarter. Adjusted operating income came in at $124.9 million and the respective margin was 8%.
Other Financials
Ulta Beauty ended the quarter with cash and cash equivalents of $560.9 million and total stockholders’ equity of $1,854.4 million. Net merchandise inventories summed $1,439.1 million at the end of the quarter. Average inventory per store fell 12.5% year over year. During the third quarter, the company repaid the $800 million that was drawn under its revolving credit facility of $1 billion in the first quarter as a measure to improve financial flexibility amid the pandemic.
Net cash from operating activities was $259,045 million for the 39 weeks ended Oct 31, 2020. Apart from this, the company had $1.58 billion available under its $1.6 billion share buyback plan that was announced in March 2020. Ulta Beauty had suspended its buyback plan on Apr 2 to preserve financial flexibility amid the pandemic. The company might resume its buyback plan in the fourth quarter of fiscal 2020.
The company now anticipates spending $150-$160 million as capital expenditure in fiscal 2020 compared with the previous guidance of $180-$200 million.
Store Updates
During the quarter, the company opened 17 new stores and relocated two. Ulta Beauty ended the third quarter with 1,262 stores. During the quarter, the company also shut down 19 stores. For fiscal 2020, the company still anticipates opening about 30 stores and relocating five. While fiscal 2021 plans are not finalized yet, management anticipates opening at least 30 stores, though the plans will continue to be assessed according to the economic conditions and costs, among other factors.
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 Oct 31, salon and brow services had resumed in nearly all stores, though they continued to be troubled by the pandemic-led local limitations and capacity constraints. Also, the company did not resume skin or makeup services due to safety reasons. Notably, the company has reactivated more than half of its furloughed workers, given the partial services resumption and operational restrictions associated with the coronavirus.
Store traffic improved during the third quarter, while e-commerce growth moderated from the first half of the fiscal. During the third quarter, e-commerce sales soared 90%, with continued strength in the buy online pickup in store or BOPIS initiative. Incidentally, BOPIS formed 16% of the company’s e-commerce sales. While e-commerce is likely to weigh on overall EBIT margins, management is on track to enhance e-commerce profitability through increased use of BOPIS, size and scale leverage, and expansion of its supply-chain network.
The company is on track with undertaking actions to support its e-commerce business. In the third quarter, it opened the Jacksonville fast fulfillment facility, extending the ship-from-store capacity to 105 stores, and expanded e-commerce operations in its distribution centers at Chambersburg, Greenwood and Dallas. Such investments have elevated Ulta Beauty’s e-commerce shipping capacity and are likely to enhance its delivery speed. Additionally, the company concluded rolling out its new booking tool for services in its app and on ulta.com during the quarter under review.
Ulta Beauty incurred additional COVID-related operating costs of about $160 million in the first nine months of fiscal 2020. It also recorded a decline in SG&A expenses to the tune of $51 million related to the employee retention credits, as part of the Coronavirus Aid, Relief and Economic Security Act (CARES Act). The company expects to incur costs in the range of $180-$190 million toward PPE and operating costs related to COVID-19 in fiscal 2020, which excludes the abovementioned SG&A expense decline of $51 million. Management expects incurring costs of $30-$40 million in fiscal 2020 due to its decision to suspend expansion in Canada.
Shares of this Zacks Rank #3 (Hold) company have rallied 20.4% in the past three months compared with the industry’s growth of 2.7%.
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