Ulta Beauty Looks Good on Stellar Q2 & Robust Growth Efforts

Ulta Beauty, Inc.ULTA is scoring high on investors' confidence, thanks to stronger-than-anticipated earnings in second-quarter fiscal 2018. Higher sales and market share gains in the quarter, coupled with sturdy e-commerce sales and salon operations have been cornerstones of the company's success. Additionally, the company's Ultamate Rewards loyalty program bodes well.

Shares of Ulta Beauty have moved up 6.4% since the company reported robust quarterly results on Aug 30. Moreover, this Zacks Rank #3 (Hold) stock has surged 31.4% in the past six months, outperforming the industry 's 16.9% rally. Also, the company has a Growth Score of B and a long-term earnings growth rate of 18.6%, which demonstrates its inherent potential.

Let's delve deeper.

Robust Q2 & Surprise History

Ulta Beauty boasts stellar earnings and sales surprise trend. The company has outpaced earnings estimates for more than three years now, except in fourth-quarter fiscal 2017. Moreover, it has delivered top-line beat in 17 of the last 19 quarters. Apart from beating earnings estimates in second-quarter fiscal 2018, both top and bottom lines grew year over year. Though sales marginally lagged the consensus mark, it grew 15.4% year over year, driven by higher comparable store sales (comps) and contribution from the adoption of the new revenue standard.

Results were fueled by the company's retail business, solid store-expansion efforts, strong e-commerce sales and loyalty program. Solid growth in prestige boutique brands, skin care and fragrance aided the performance as well. As a result, management reaffirmed its guidance for the fiscal.

Stellar Omni-Channel Initiatives

Ulta Beauty has been progressing well on its strategy of striking the right balance between online and physical stores. Notably, the company's e-commerce sales surged 37.9% in second-quarter fiscal 2018, reflecting about 250 bps of the total comps growth. This was driven by about 40% rise in traffic and 50% growth in mobile traffic. For fiscal 2018, management anticipates e-commerce sales to grow in the 40% range.

Additionally, the company inaugurated 19 stores while shuttered two in the fiscal second quarter. Management plans to open 100 stores and remodel or relocate 15 outlets in fiscal 2018. Notably, it is on track to reach its target of 1,400-1,700 stores in the United States in the coming years. Also, Ulta Beauty's latest distribution center in Fresno, CA, has been serving e-commerce and retail operations. The distribution is expected to serve approximately 170 stores besides retaining its existing share of about 20% of e-commerce sales in the fall season.

Other Endeavors

Ulta Beauty's loyalty program remains one of the major contributors to sales growth. The company increased its Ultamate Rewards loyalty program to 29.5 million active members at the end of the second quarter, up 15.5% year over year. Growth is fueled by the company's excellent marketing and merchandising endeavors as well as improved store productivity and e-commerce. The company is likely to continue this momentum, driven by the addition of brands, maturation of loyalty members, and gains from Platinum and Diamond Tiers alongside higher penetration of the credit card program. Credit card, gift card and loyalty programs are expected to remain sturdy, and boost the company's overall profitability.

Armed with a robust beauty brand portfolio, this cosmetics retailer keeps on rolling out brands and products. Further, management remains keen on enhancing beauty products offerings. The company has been witnessing sturdy growth in the expansion of brands like NARS, MAC, Clinique, Lancome, The Estee Lauder Companies Inc. EL , Morphe and Chanel Beaute. These brand rollouts are likely to drive results in the second half of fiscal 2018. The company also announced its partnership with Kylie Cosmetics, which is expected to launch later in fiscal 2018.

Bottom Line

Despite the strong performance, Ulta Beauty witnessed margin contractions in the fiscal second quarter. In fact, the company has been grappling with soft operating margins for the last four quarters due to higher SG&A expenses. This is likely to continue in the future as reflected by the operating margin guidance of a 50-70 bps decline in fiscal 2018.

Nevertheless, solid omni-channel endeavors and strength in loyalty program, coupled with robust brand portfolio and new rollouts, will boost the company's performance and keep driving the momentum of the stock.

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Five Below, Inc. FIVE has an impressive long-term earnings growth rate of 28% and a Zacks Rank of 2 (Buy). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .

Tractor Supply Company TSCO , also a Zacks Rank #2 stock, has delivered an average positive earnings surprise of 3.4% in the trailing four quarters. Also, it has a long-term earnings growth rate of 12.8%.

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

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

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