Ulta Beauty (ULTA) Stock Up on Q1 Earnings Beat, Raised View

Ulta Beauty, Inc. ULTA, which has been delivering positive earnings and sales surprises consistently for over three years, posted stellar results for first-quarter fiscal 2017. Keeping its robust trend alive, both the top line and the bottom line topped our estimates, alongside improving year over year. The sturdy quarter also called for a perked up guidance for fiscal 2017, which was welcomed by investors, as shares of this cosmetics retailer gained 4.5% in the after-market trading session yesterday.

Moreover, thanks to its splendid past performance, Ulta Beauty’s shares have surged 37.1% in the last one year, crushing the Zacks categorized Retail – Miscellaneous/Diversified industry that dropped 4.8% over the same time frame.

Results in the first quarter were fueled by efficient execution of the company’s growth plans. Further, results were driven by constant merchandise innovations, solid marketing initiatives, outstanding e-Commerce improvement and continued progress at the company’s salon operations.

Solid Q1 Numbers

Coming to numbers, the company posted adjusted earnings of $1.91 per share, surpassing the Zacks Consensus Estimate of $1.79 and soared 31.7% year over year. Including the 14 cents impact from the adoption of a new accounting standard, this Zacks Rank #3 (Hold) company’s earnings jumped 41.4% to $2.05 per share.

Ulta Beauty Inc. Price, Consensus and EPS Surprise

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

Net sales advanced 22.5% year over year to $1,314.9 million, exceeding the Zacks Consensus Estimate of $1,276 million. The upside was driven by solid comps and productivity from new stores.

Comps (including stores and e-commerce) improved 14.3%, compared with 15.2% growth in the prior-year quarter. Comps growth came on the back of favorable traffic and ticker, along with store growth and stupendous e-Commerce improvement. During the quarter, the company registered transaction growth of 8.7% while average ticket was up 5.6%.

Overall, retail business (comprising retail and salon) delivered comps growth of 10.9%, including comps growth of 10.5% for retail and 9.9% for salon. Retail comps growth was driven by 6.2% improvement in traffic and 4.7% rise in ticket. Ticket growth was aided by higher average selling price as well as transactions. In the salon business, improvement in comps was backed by ticket and traffic growth.

Sales for the salon business increased 16.7% to $68.7 million. Additionally, Ulta Beauty witnessed a whopping 70.9% growth in e-Commerce sales to $104.3 million in the quarter. This reflects about 340 bps of the total comps growth recorded in the quarter.

Gross profit grew roughly 22% year over year to $476 million. However, gross profit margin contracted 20 bps to 36.2%, on account of planned supply chain investments and greater mix of e-Commerce sales, partly compensated by lower fixed store expenses.

Operating income advanced 28% year over year to $188.4 million, while operating margin improved 60 bps to 14.3%. The robust expansion in operating margin is attributed to a 80 bps decline in SG&A expenses as a percentage of sales, which more than offset the fall in gross margin.

Other Financials

Ulta Beauty ended the quarter with cash and cash equivalents of $321.7 million, short-term investments of $150 million and shareholders’ equity of $1,641.7 million. Merchandise inventories totaled $1,048.4 million, marking an increase of 11.1% from the year-ago period. Average inventory per store increased 11.2%.

Net cash provided by operating activities came in at $175.7 million in the first quarter.

During the quarter, the company bought back 184,667 shares for a total of $51.6 million. As of Apr 29, 2017, the company had about $425 million worth of authorization remaining under the $425 million buyback plan approved in Mar 2017.

Store Update

In the fiscal first quarter, the company opened 18 new stores and shuttered one store. With this, the company operated 990 stores, as of the end of the first quarter, while increasing its total square footage by 12%.

In fiscal 2017, the company plans to open 100 net new stores, remodel 11 stores and relocate 6 outlets. This includes plans to open 25 new stores in the second quarter.

Guidance

Following an excellent quarter, Ulta Beauty raised its comps and earnings outlook for fiscal 2017. The company now expects to deliver comps growth (including e-Commerce) in the range of 9–11%, up from the old projection of 8–10%.

Further, the company upgraded its fiscal 2017 e-Commerce sales growth forecast to a range of 50%, from a 40% range expected earlier. Consequently, management now envisions earnings per share growth to come in mid-twenties percentage band, up from low-twenties percentage range guided earlier.

Earnings per share forecast for fiscal 2017 includes the impact of the additional 53rd week; nearly $300 million impact from share repurchases and the effect of tax rate benefit realized in the first quarter. However, the company will exclude all tax-related impacts from the adoption of the new accounting standard for the rest of fiscal 2017.

Apart from this, Ulta Beauty expects to spend about $460 million toward capital expenditures in the fiscal, of which about $80 million will be used to fund the expansion of prestige brand.

For fiscal second quarter, the company anticipates net sales in a range of $1,257–$1,278 million, compared with $1,069 million delivered in the prior-year quarter. Comps are expected to grow in the range of 10–12% compared with 14.4% increase registered in second-quarter fiscal 2016. Moreover, e-Commerce sales are projected to surge in a 50% range.

Earnings per share for the fiscal second quarter are expected in the range of $1.72–$1.77, compared with $1.43 earned in second-quarter fiscal 2016.

Key Picks in Ulta Beauty’s Territory

Some better-ranked stocks in the same industry include Big 5 Sporting Goods Corp. BGFV, Build-A-Bear Workshop, Inc. BBW and The Michaels Companies, Inc. MIK.

Big 5 Sporting has a long-term earnings growth rate of 12% and has a superb earnings surprise history. Further, the company sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Build-A-Bear, with a long-term earnings growth rate of 22.5%, currently flaunts a Zacks Rank #1.

Michaels Companies, which carries a Zacks Rank #2 (Buy), has a long-term earnings growth rate of 16%.

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