Ulta Beauty (ULTA) has just reported what appeared to be a solid quarter but is now being punished by the Street. We have surmised that there is no bottom in sight, despite analysts all having bullish price targets. However, when one forms, buyers come out. We have watched the stock head lower for 6 months straight on the sidelines, yet are on the cusp of being buyers. However, we want to wait for a bottom formation.
That said, coming into the summer, this beauty company was firing on most cylinders. A cursory glance at the results at earnings over the last two years shows the company continues to accelerate market share gains while continuing to grow its loyalty program. It is simply impressive. But the momentum is negative and sometimes it is tough to fight the Street. We note that there is strength across nearly all product categories Skincare products, fragrances, and haircare related items are all seeing higher sales. Most notably, Ulta is killing it with growth in e-commerce. Despite what seems like very positive news, shares are suffering. What is happening?
Basically expectations were not exceeded, and so there is disappointment from the Street, which we think is silly. Net sales increased 18.6% to $1,342.2 million from $1,131.2 million in the third quarter of fiscal 2016. The Company estimates that Hurricanes Harvey and Irma resulted in approximately $14 million in lost sales; Comparable sales (sales for stores open at least 14 months and e-commerce sales) increased 10.3% compared to an increase of 16.7% in the third quarter of fiscal 2016. The 10.3% comparable sales increase was driven by 6.0% transaction growth and 4.3% growth in average ticket. Ulta estimates that Hurricanes Harvey and Irma resulted in approximately 100 basis points of negative impact to comparable stores sales in the third quarter of fiscal 2017; Retail comparable sales increased 6.6%, including salon comparable sales growth of 3.8% while Salon sales increased 10.8% to $66.9 million from $60.4 million in the third quarter of fiscal 2016. Finally, E-commerce sales grew 62.9% to $119.8 million from $73.6 million in the third quarter of fiscal 2016, representing 370 basis points of the total company comparable sales increase of 10.3%.
Profit remained strong but margins suffered. Gross profit as a percentage of net sales decreased 110 basis points to 36.7% from 37.8% in the third quarter of fiscal 2016. Expenses however did fall as a percent of sales and this is very positive. Selling, general and administrative expenses as a percentage of net sales decreased 90 basis points to 23.9%, compared to 24.8% in the third quarter of fiscal 2016. Operating income increased 16.5% to $162.7 million, or 12.1% of net sales, compared to $139.7 million, or 12.4% of net sales, in the third quarter of fiscal 2016. This was a strong result.
It all led to net income rising 19.5% to $104.6 million compared to $87.6 million in the third quarter of fiscal 2016.Income per diluted share increased 21.4% to $1.70, including a benefit of $0.04 due to a lower tax rate, a benefit of $0.03 due to a lower share count, offset by approximately $0.08 due to the impact of Hurricanes Harvey and Irma in the quarter, compared to $1.40 in the third quarter of fiscal 2016. So what does this all mean?
With these results, we like the name, but shares could face pressure. The outlook to us is positive. The selling seems to be just momentum based. Let it fall. While we cannot see a bottom in sight, with the company repurchasing shares, earnings growing, a decent balance sheet, and comparable sales are expected to grow double digits next quarter and for the year. While the name is trading at a premium valuation even after the sales decline, most analysts are bullish with massive upside targets. The growth is there. We just need a bottom.
We want you to join our community
Benefits of signing up for a FREE membership now:
-No more costly delays in waiting for material
-Dozens of publications per week, including news coverage, earnings commentary, analysis, politics, and more
-Access to special guest contributions, including from WSJ, CNBC, and prolific SA authors
–Ability to comment on articles
–Access to our weekly newsletter
-Publish your own opinion/analysis
…..and FREE access to our upcoming paid content for life
Thank you for your readership, and for your loyalty.
Not interested? We understand. However, you will miss out on the insights we have provided over the years, that helped drive us to the NUMBER ONE AUTHOR on long ideas on the Seeking Alpha Platform,