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Ulta Beauty (ULTA) Stock Down on Q2 Earnings Miss, View Cut

Shares of Ulta Beauty, Inc. ULTA crashed around 21.6% in the after-hours trading session on Aug 29, as it posted dismal second-quarter fiscal 2019 results. The company’s top line and bottom line missed the Zacks Consensus Estimate. Lower-than-expected results also prompted management to cut its view for fiscal 2019. We note that the current outlook for fiscal 2019 indicates headwinds in the US cosmetics market. All these factors hurt investors’ sentiment.

Nevertheless, the company’s earnings and sales improved on a year-over-year basis. Notably, robust traffic and ticket growth, improvement in comparable sales (comps) as well as higher market share gains positively impacted its quarterly results. Let’s discuss.

Q2 Numbers

Ulta Beauty’s adjusted earnings grew 12.2% to $2.76 per share but lagged the Zacks Consensus Estimate of $2.79. Including tax gains of about 4 cents, the company’s earnings rose 11.5%.

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 cosmetics retailer grew 12% year over year to $1,667 million but missed the Zacks Consensus Estimate of $1,676 million. Comps — including stores and e-commerce — climbed 6.2%, up from 6.5% growth recorded in the prior-year quarter. Increase in traffic and ticket along with higher store productivity led to comps growth. During the fiscal second quarter, the company registered a transaction increase of 5.4% while average ticket was up 0.8%.

Gross profit increased nearly 13.2% year over year to $605.9 million, with gross margin expansion of 40 basis points (bps) to 36.4%. Gross margin expansion was mainly backed by higher merchandise margins stemming from impressive marketing and merchandising strategies as well as leveraged fixed store expenses. The improvement was somewhat offset by deleveraging due to investments in salon services.

Further, operating income increased 7.3% year over year to $208 million. However, operating margin contracted 50 bps to 12.5% as higher gross margin was offset by a 90 bps rise in SG&A expenses (as a percentage of sales). Pre-opening expenses improved 11.1% to $5 million.

Other Financials

Ulta Beauty ended the quarter with cash and cash equivalents, and short-term investments of $327.4 million, and total stockholders’ equity of $1,839.5 million. Net merchandise inventories summed $1,316 million as of Aug 3, 2019, marking an increase of almost 7.9% from the year-ago period. Also, average inventory per store was flat year over year.

Net cash provided by operating activities was roughly $447.3 million at the end of first six months of fiscal 2019.

Ulta Beauty bought back 791,603 shares for $270.9 million in the reported quarter. With this, the company had nearly $517.3 million outstanding as of Aug 3, 2019, under its $875-million share repurchase plan announced in March 2019.

Store Updates

In the fiscal second quarter, Ulta Beauty opened 20 stores while it shuttered three stores. As of Aug 3, 2019, it operated 1,213 stores, increasing its total square footage by 7.9% year over year.

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

Guidance

For fiscal 2019, management projects total sales to increase 9-12% compared with the previous view of growth in the low double-digits percentage range.

Comps are expected to increase nearly 4-6%, indicating a decline from 8.1% growth registered in fiscal 2018. Comps growth guidance includes e-commerce improvement of 20-30%. Earlier, management projected comps to rise in the range of 6-7%.

Further, the company expects operating margin deleverage of 60-70 bps for fiscal 2019 compared with prior guidance of operating margin leverage of 10-20 bps. Earnings per share are now envisioned to be $11.86-$12.06. Earlier, the company projected earnings in a range of $12.83-$13.03. The Zacks Consensus Estimate for earnings is pegged at $12.96.

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

For third-quarter fiscal 2019, Ulta Beauty expects earnings per share growth to be in the range of flat to low teens. The company projects gross margin expansion, lower comps growth and higher SG&A costs. Further, it envisions earnings per share growth in the mid-single-digit range for fourth quarter of fiscal 2019.

The company plans to spend about $340-$350 million as capital expenditures in fiscal 2019 compared with $319 million incurred last year. Also, it expects to incur depreciation and amortization charges of $300 million.

Price Performance

Shares of this Zacks Rank #2 (Buy) stock have gained 37.9% year to date, outperforming the industry's 4.7% rally.

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