Ulta Beauty Turns Heads Via Blowout Q2, Hot Prospects

By
A A A

If anyone knows how to make heads turn for another glimpse, it's the folks at Ulta stores.

Makeup, anti-aging creams, hair styling tools -- name a type of product that ups a person's beauty quotient andUlta Beauty ( ULTA ) sells it.

Recently, the one-stop salon and beauty products retailer has been upping its own beauty quotient -- on Wall Street and with customers.


Ulta stock surged 17% on Sept. 13, after it reported second-quarter financials that sailed past views as it wowed customers with trendy new products, added more Clinique and Lancome branded boutiques to its stores, and lured more members into its generous loyalty program. Earnings climbed 30% to 70 cents a share, 3 cents ahead of forecasts.

Revenue popped 25% to $601 million, ahead of analyst views for $588.37 million.

Sales for stores open at least 14 months grew 8.4% vs. a year earlier, including the impact of e-commerce. That's a faster pace than the 6.7% gain it saw in the first quarter. E-commerce sales grew 72%, representing 130 basis points of the total company same-store sales increase.

Ulta has seen its profits grow by double digit percentages or better for the past 17 quarters. And if Wall Street is on target, that trend will continue. Analysts surveyed by Thomson Reuters see full-year 2013 earnings rising 25% to $3.34 a share. They expect a 26% rise in 2014 and a 25% gain in 2015.

The impressive report was the first financial showing announced by CEO Mary Dillon, who took the helm July 1. Dillon had been CEO ofU.S. Cellular ( USM ). She replaced Chuck Rubin, who left Ulta in February to become CEO of arts and crafts retailer Michaels Stores.

Middleman At Both Ends

Ulta has carved a niche in the specialty retail space as a one-stop shop for hair salon services and beauty and salon products at a variety of prices. It features more than 20,000 products, ranging from high-priced so-called prestige brands sold in department and specialty stores to lower-priced labels sold via the mass channel, including drugstores and discounters. It also offers a full-service hair salon in its stores.

"The key to Ulta's success is providing customers with convenience as a one-stop shop for beauty across all price segments and categories as well as an exciting shopping environment with a continual flow of new products and brands," said Telsey Advisory Group analyst David Wu. "Most recently we've seen a solid comp acceleration driven primarily by a higher ticket as the prestige skin care and color cosmetics continue to outperform all other categories."

Ulta has seen a nice run-up in its stock, which has traded at several fresh highs since the earnings report. Wu attributes the stock lift to the fact that Ulta saw an improving comp trend in the second quarter.

"It also saw a better-than-expected operating margin improvement," he added. "And the company continues to take significant market share in the U.S. beauty market from department stores, which continue to lose share."

Ulta's expansion of prestige brand boutiques for major flagship lines such as Clinique and Lancome, says Wu, has "strongly resonated" with customers and helped drive a higher ticket during the quarter.

Ulta added 39 Clinique boutiques in the second quarter; so it now has 90 stores featuring thisEstee Lauder ( EL )-owned brand. It expects to add 10 more Clinique boutiques during 2013. Five Lancome boutiques were added, bringing the total stores offering Lancome products to 85, with 20 additional Lancome boutiques underway.

Wu says the prestige segment continues to outperform all other segments in the beauty industry, a lot of which has been driven by strong innovation and solid demand, particularly in skin care.

From September 2012 to August 2013, the prestige beauty market grew 6% from a year earlier to $10.7 billion in sales, tallies Karen Grant, vice president and global industry analyst at the NPD Group.

Skin care sales grew 8% over that time, and makeup sales 7%.

Grant says while the growth in prestige beauty sales is still "steady and positive," it's not quite as accelerated as it had been last year or the prior year, as the industry faces tough comparisons.

Ulta has been cashing in on the segment's growth.

"Part of what's going on with stores like Ulta is we continue to see the specialty-store channel as the top channel for the prestige shopper," Grant told IBD. "One of the things consumers tell us is they love the format, which offers the freedom to choose from multiple brands. They also love the low pressure of the sales associates."

Department Store Rival

Wu calls Ulta, Sephora and other specialty beauty product stores "the future of U.S. beauty retailing."

"I expect these specialty beauty retailers to continue to take a significant share from department stores as consumers opt for convenience, a wide range of product options and a less intimidating environment," he said.

Ulta has drawn a loyal customer base. In the second quarter, its loyalty program membership grew to 12 million active members, up 19% from a year earlier.

On the new product front, Ulta is launching several new brands in the current quarter that have a strong following and unique brand personalities.

The names include Jamie Kern Lima's It Cosmetics line of color cosmetics that uses recently developed anti-aging ingredients along with appearance enhancers such as brightening pigments. Another brand is former supermodel Cindy Crawford's Meaningful Beauty anti-aging skin care system lineup.

Wu expects Dillon will be an "effective leader," given her experience in managing high-growth consumer companies.

"I think she's a great cultural fit," he said.

He sees Dillon continuing to pursue the company's existing growth strategy.

"Her top priority is to support store growth plans, address the business needs in supply chain management and omnichannel, and add an emotional point of view to the Ulta brand," adds Citi Research analyst Oliver Chen. "She's very highly energized."

Ulta ended the second quarter with 609 stores in 46 states. It expects to have 675 stores by year-end. The company's long-term guidance is to grow its square footage by 15% to 20% a year.

Chen says that long-term goal translates to "extremely attractive" square footage growth. He says the sector average in the companies he follows is between 3% and 5%.

Wu expects Ulta's sales to rise at around a 20% compound annual growth rate over the next five years as it benefits from mid-single-digit comp growth and "robust" store expansion. He says it has the ability to double its store base to about 1,200 locations over time.

Chen expects Ulta to keep its momentum as it benefits from strong traffic and pricing growth and new product innovations. It has the opportunity to keep gaining share from department stores, he adds.

Ulta is the third-largest company in IBD's Retail-Specialty industry group, after eyewear makerLuxottica Group ( LUX ) andPetSmart ( PETM ), and just ahead ofGNC Holdings (GNC) and beauty products sellerSally Beauty Holdings (SBH).



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: EL , LUX , PETM , ULTA , USM

Investor's Business Daily

Investor's Business Daily

More from Investor's Business Daily:

Related Videos

Stocks

Referenced

Most Active by Volume

100,376,898
  • $17.62 ▲ 0.51%
83,231,837
  • $25.62 ▲ 1.91%
75,739,329
  • $111.78 ▼ 0.77%
65,297,937
  • $36.37 ▼ 1.76%
59,053,093
  • $47.66 ▲ 0.29%
53,482,350
  • $2.59 ▼ 0.38%
51,504,284
  • $7.34 ▲ 2.37%
51,434,656
  • $8.14 ▲ 6.96%
As of 12/19/2014, 04:15 PM


Find a Credit Card

Select a credit card product by:
Select an offer:
Search
Data Provided by BankRate.com