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Ulta Beauty's (ULTA) Q3 Earnings Top Estimates, Shares Rise

Zacks Equity Research

Ulta Beauty, Inc. ULTA posted third-quarter fiscal 2019 results, wherein both top and bottom lines improved year over year and the latter beat the Zacks Consensus Estimate. Results were backed by an improved gross margin as well as a rise in ticket and transactions. Management is impressed with its solid performance despite the challenges in the U.S. beauty category, due to the soft makeup business. In fact, Ulta Beauty continued to see market share gains in all beauty categories.

Markedly, shares of the company gained 9.3% during the after-market trading session on Dec 5.

However, the top line marked its third consecutive quarterly miss. Management squeezed its fiscal 2019 guidance range for sales, comparable sales (comps) and earnings per share.

Q3 Numbers

Ulta Beauty’s earnings grew 3.2% to $2.25 per share and surpassed the Zacks Consensus Estimate of $2.13. This included gains from federal income tax credits. The year-over-year rise in the bottom line can be attributable to improved sales and margins.

Ulta Beauty Inc. Price, Consensus and EPS Surprise

Net sales of this cosmetics retailer grew 7.9% year over year to $1,682.5 million but missed the Zacks Consensus Estimate of $1,692 million. Comps (including stores and e-commerce) climbed 3.2%, compared with 7.8% growth recorded in the prior-year quarter and 6.2% in the preceding quarter. Increase in transactions and average ticket led to the increase. During the third quarter, the company registered a transaction increase of 2.3%, while average ticket was up 0.9%.

Gross margin expanded 40 basis points (bps) to 37.1%, backed by higher merchandise margins stemming from impressive marketing and merchandising strategies. Also, fixed-store expense leverage aided the gross margin. This was somewhat offset by impacts from investments in salon services.

However, operating margin contracted 80 bps to 10% as higher gross margin was offset by a 140 bps rise in SG&A expenses (as a percentage of sales). Pre-opening expenses grew 14.5% to $6.5 million.

Other Financials

Ulta Beauty ended the quarter with cash and cash equivalents of $208.8 million, and total stockholders’ equity of $1,847.2 million. Net merchandise inventories summed $1,616.9 million as of Nov 2, increasing 8.9% from the year-ago period. Also, average inventory per store rose 2.1% year over year.

Net cash provided by operating activities was roughly $557.5 million at the end of the first nine months of fiscal 2019.

Ulta Beauty bought back 529,404 shares for $128.6 million in the reported quarter. In the first three quarters of fiscal 2019, the company repurchased 1,639,438 shares for $506.9 million. With this, the company had $388.8 million outstanding, as of Nov 2, under its $875-million share repurchase plan announced in March.

Store Updates

During the third quarter, Ulta Beauty opened 31 stores and shuttered three. As of the end of the quarter, it operated 1,241 stores, increasing its total square footage by 6.9% year over year.

In fiscal 2019, the company plans to open nearly 80 stores and remodel or relocate 20. Also, it intends to complete roughly 270 store refreshes.

Guidance

Management is impressed with the company’s efforts to strengthen brand portfolio through collaborations and innovation. It is particularly impressed with the skincare category. Further, during the quarter, Ulta Beauty expanded its mobile pilot point-of-sale to stores with increased volumes. This is likely to help the company enhance customer experience during the holiday season.

For fiscal 2019, management now projects total sales to increase 10% compared with the previous view of 9-12% growth. Comps are expected to increase 4.7-5% now, which includes e-commerce improvement of 20-30%. Earlier, management projected comps to rise 4-6%.

The company continues to expect operating margin deleverage of 60-70 bps for fiscal 2019. Earnings per share are now envisioned to be $11.93-$12.03 compared with the prior projection of $11.86-$12.06. The Zacks Consensus Estimate for earnings is pegged at $11.90 per share.

Markedly, Ulta Beauty’s earnings guidance includes the impact of share repurchases worth roughly $700 million and an effective tax rate of 23%.

The company plans capital expenditures of $305-$315 million for fiscal 2019 compared with $340-$350 million projected earlier.

Price Performance

Shares of this Zacks Rank #4 (Sell) company have lost 7.2% over the past year against the industry's growth of 3%.

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