Will Ulta Beauty's (ULTA) Soft Margins Hurt Earnings in Q2?

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Ulta Beauty, Inc.ULTA is slated to release second-quarter fiscal 2018 earnings on Aug 30, after the closing bell. The company pulled off a positive earnings surprise of 6.1% in the last-reported quarter. Moreover, it has more than three-year-long positive earnings trend, barring a miss in fourth-quarter fiscal 2017. In the trailing four quarters, Ulta Beauty surpassed the Zacks Consensus Estimate by an average of 2.5%. Further, the company has delivered a sales beat in 16 out of the last 18 quarters.

Ulta Beauty Inc. Price and EPS Surprise

Ulta Beauty Inc. Price and EPS Surprise | Ulta Beauty Inc. Quote

However, the Zacks Consensus Estimate of $2.40 for the fiscal second quarter declined by a penny in the last 30 days but reflected a year-over-year improvement of 31.2%. Management envisions earnings per share of $2.35-$2.40 for the fiscal second quarter.

Moreover, Ulta Beauty has lagged the industry in the past month due to soft margins, resulting from higher expenses. The stock has declined 0.7% while the industry increased 6.7%.

Let's see how things are shaping up prior to the earnings announcement.

Factors Influencing 2Q18

Ulta Beauty's enhanced market share, solid marketing and store-growth initiatives, comps growth, impressive e-commerce improvement, and continued progress on salon operations have been significantly aiding results. Notably, the company recorded 48% growth in e-commerce sales. Additionally, favorable traffic is driving comparable store sales (comps) growth.

For fiscal 2018, management expects total sales to increase in low teens percentage, with comps growth (including e-commerce) of 6-8%. Meanwhile, it continues to anticipate e-commerce sales growth of 40%. Moreover, management envisions GAAP earnings per share to grow in the low 20% range versus the earlier guidance of roughly 20% range.

For the fiscal second quarter, the company anticipates net sales of $1,475-$1,488 million compared with 1,289.9 million in the prior-year quarter. Comps, including e-commerce sales, are predicted to grow 6-7% compared with 11.7% rise in second-quarter fiscal 2017. Earnings per share for the impending quarter are envisioned to be $2.35-$2.40 compared with $1.83 in the comparable quarter, last fiscal.

Notably, the company is making efforts to strengthen its e-commerce business by enhancing supply chain capabilities. In this regard, it is opening a new distribution center in Fresno, CA. It already has distribution centers in Dallas, TX, and Greenwood, IN.

The company's loyalty program is another key sales driver, which boosted its first-quarter fiscal 2018 sales. Ulta Beauty increased its Ultimate Rewards membership by 17%, driven by its excellent marketing and merchandising endeavors as well as in-store conversions. Meanwhile, sales per member, average member ticket, retention rates and the frequency of shopping remained solid in the fiscal first quarter.

Furthermore, Ulta Beauty boasts a strong mix of beauty products. The company's stores are a one-stop shop for beauty enthusiasts, featuring prestige and discount beauty brands, and offering salon products and services, all under one roof.

However, Ulta Beauty is grappling with soft margins due to higher SG&A and pre-opening expenses. Although operating margin is expected to contract 50-70 bps in fiscal 2018, we are optimistic that Ulta Beauty's growth plans will help offset margin woes.

Zacks Model

Our proven model does not conclusively show that Ulta Beauty is likely to beat estimates this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

Ulta Beauty's Earnings ESP of -0.38% and a Zacks Rank #4 (Sell) make surprise prediction inconclusive.

Stocks With Favorable Combination

Here are some companies that you may want to consider as our model shows that these have the right combination of elements to post an earnings beat:

DICK'S Sporting Goods Inc. DKS has an Earnings ESP of +1.48% and a Zacks Rank #2. You can see the complete list of today's Zacks #1 Rank stocks here .

The Michaels Companies, Inc. MIK has an Earnings ESP of +0.94% and a Zacks Rank of 2.

Dollar Tree, Inc. DLTR has an Earnings ESP of +2.41% and a Zacks Rank #2.

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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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