Illinois-based beauty product retailer Ulta Beauty (ULTA
-24.69, -8.4%) trades down today as light guidance coupled with margin
pressure pushes ULTA to a five-week low.
To be sure, there weren’t many surprises in the third quarter report. On November 8 ULTA hosted an analyst and investor conference wherein the company outlined third quarter expectations, fiscal year 2018 guidance, and a “long-term outlook,” which allowed the stock to launch to five-month highs.
Last night, then, ULTA reported third quarter results that were essentially in-line with said pre-announcement. A modest beat to earnings per share guidance – ULTA management highlighted in November that this could come in at the “high end” – saw Q3 EPS come in at $2.18. A $0.02 benefit due to income tax accounting for share-based compensation, compared to $1.70 in the third quarter of fiscal 2017, which included a $0.04 benefit due to income tax accounting for share-based compensation, helped the result.
Sales were in-line with market views at $1.56 bln, up 16.2%. Comparable sales, too, were in-line, at +7.8% compared to an increase of 10.3% in the third quarter of fiscal 2017. The 7.8% comparable sales increase was driven by 5.3% transaction growth and 2.5% growth in average ticket.
Overall, promotions were flat year-over-year, with lower circulation of some of the company’s print catalogs and newspaper inserts and three weeks of its postcard 20% offer this year, compared to four weeks of the same offer last year, offset by increased digital marketing.
The difference between ULTA’s original plan and the actual results were mainly due to a clearance event that began at the end of the second quarter and continued into the first several weeks of the third quarter. Management highlighted that it took ULTA longer than expected and the company took deeper markdowns than expected to sell through the discontinued inventory in order to clean up its back rooms and to get its stores ready for new launches ahead of the holiday season.
Gross profit as a percentage of net sales remained flat at 36.7% compared to last year due to category and channel mix shifts and investments in the company’s salon services and supply chain operations, which were fully offset by leverage in fixed store costs and the impact of new revenue recognition accounting.
Expenses also picked up in the quarter; specifically, SG&A expenses as a percentage of net sales increased 140 basis points to 25.3% compared to 23.9% a year ago due to deleverage from investments in store labor to support growth initiatives, deleverage in marketing expenses, and the impact of new revenue recognition accounting. This was partially offset by leverage in corporate overhead.
Most of the today’s weakness, though, can be attributed to soft guidance from the press release; ULTA expects Q4 net sales in the range of $2.085-2.103 bln, compared to actual net sales of about $1.94 bln a year ago, which included $108.8 mln of sales for the 53rd week. Also, management expects comparable sales for Q4, including e-commerce sales, to increase 7-8%. Q4 diluted EPS is estimated to be in the range of $3.50-3.55.
Management also maintained certain fiscal 2018 guidance, including an increase in total sales in the low teens percentage range; a goal to achieve comparable sales growth of approximately 7% to 8%; an e-commerce sales growth target in the 40% range; and hopes to deliver diluted earnings per share growth in the low twenties percentage range, including the impact of approximately $500 mln in share repurchases and assuming a 24% effective tax rate, among other points.
All told, it could have been much worse – at least for the stock – as investors keep an eye on long-term guidance, which remains intact. After giving up the 50-day simple moving average (287.03) yesterday, the stock ultimately closed above that level as pressure in the broader market waned in late action on Thursday, allowing for some stocks to recoup a portion of opening losses, including ULTA. Today’s trading in ULTA has been decidedly negative as the stock opened below the 50-day SMA, trimming its YTD advance to 20.3% vs the 1.5% decline in the S&P 500 Retail SPDR (XRT 44.50, -0.49, -1.1%) during that time.
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