Double-digit sales growth, double-digit comparable sales growth, and double-digit earnings per share growth... what's not to like about that triumvirate, particularly if you are a retailer? In most cases, there is nothing not to like, yet Ulta Beauty (ULTA 210.00, -12.59, -5.3%) is not most retailers.
Ulta has a higher growth expectation to live up to, and it would appear by the drop in its stock price in pre-market action that investors feel the company did not live up to the high growth standard set for the leading cosmetics retailer.
The headlines capturing Ulta's third quarter results were enviable for a lot of companies. Net sales increased 18.6% to $1.34 billion, comparable sales increased 10.3%, e-commerce sales surged 62.9% to $119.8 million, and income per diluted share increased 21.4% to $1.70, including a $0.07 benefit from a lower tax rate and share buyback activity that was offset by an approximately $0.08 impact from Hurricanes Harvey and Irma.
What exactly is the problem, then, for shareholders? Several items stand out:
- Ulta said it saw a moderation in the growth rate of makeup, which is its largest category
- Deleveraging in merchandise margins contributed to a 110 basis points drop in its gross margin rate of 36.7%
- Comparable sales growth, while solid, is decelerating (comparable sales were up 16.7% in the third quarter a year ago and this quarter was the lowest comparable sales increase in nine quarters)
- The quality of the EPS growth was not as solid given that a lower tax rate and reduced share count played a part in matters; and
- Ulta's fourth quarter EPS guidance came up shy of analysts' average expectation
The company's fourth quarter outlook calls for net sales in the range of $1.926 billion to $1.959 billion, comparable sales to increase 8% to 10%, versus 16.6% last year, and income per diluted share in the range of $2.73 to $2.78.
Ulta reaffirmed its fiscal 2017 outlook, which includes comparable sales growth of approximately 10% to 11%, and EPS growth in the high twenties percentage range.
At the close of Thursday's trading, ULTA was down 13% year-to-date. That underperformance has been dictated by concerns about increased competition and the difficulties Ulta could have living up to high growth expectations.
With some growth blemishes apparent in the third quarter report, it seems that ULTA just isn't looking as pretty as before to growth-oriented investors.