Ulta Salon, Cosmetics & Fragrance Inc. (ULTA) posted third quarter 2011 earnings of 42 cents per share, which surpassed the Zacks Consensus Estimate of 38 cents. Quarterly earnings almost doubled from the year-ago level of 23 cents a share, beating management’s guided range of 36 cents to 38 cents.
The better-than-expected results were attributable to double-digit growth in the top line resulting from robust guest count as well as a rise in average ticket price.
Quarter Highlight
Net sales in the reported quarter increased 21.8% year over year to $413.1 million and were well above management’s projected range of $400.0 million to $407.0 million. The year-over-year increase was driven by higher comparable store sales, which grew 9.6% compared with 12.2% reported in the prior-year quarter.
Gross margin expanded 100 basis points (bps) year over year to 36.1% mainly attributable to strong sales growth combined with leverage in selling, general and administrative expenses (SG&A). The quarter’s SG&A expenses, as a percentage of sales, fell 160 bps to 24.0%. Operating income surged 81.9% year over year to $44.2 million, while the operating margin grew 320 bps to 10.7%.
Financial Position
Ulta ended the quarter with cash and cash equivalents of $130.7 million and had no debt on its balance sheet.
Merchandise inventories at the end of the quarter stood at $354.9 million compared with $301.6 million at the end of the year-ago quarter. The increase was mainly based on the addition of 58 new stores since October 30, 2010. However, average inventory per store increased 2.2% year over year, in sync with a planned initiative to equip supply chain with holiday inventory earlier than last year.
Store Update
Ulta opened 28 new stores in the quarter and closed one store, thus bringing the total number to 442.
Outlook
Ulta expects its earnings growth to expand further in the fourth quarter of 2011. The company expects earnings per share between 62 cents and 64 cents, a growth from 49 cents in the year-earlier quarter, aided by Ulta’s sound marketing, merchandising and stores expansion strategies. The company is also poised for a strong 2012 store pipeline.
Net sales are estimated in the range of $552 million to $562 million based on a comparable store sales growth of 6% to 8%.
Our Take
Ulta, the largest beauty retailer that provides one-stop shopping for prestige, mass and salon products and salon services in the U.S., continues to deliver solid numbers. Increased traffic, efficient cost-containment efforts, strong execution in inventory management and last but not the least, a firm balance sheet were the reasons behind this strength.
We expect Ulta to outperform the holiday season backed by an exciting line-up of merchandising and marketing plans as well as new product offerings across all categories. Management remains hopeful especially on the fragrance category, sales of which was robust in third quarter and should bode well during the gift-giving season. In fact, the momentum will continue beyond the holidays, with Ulta’s skincare event in January.
The beauty retailer has also provided a fourth quarter earnings outlook, which is above the Zacks Consensus Estimate of 60 cents. Ulta currently retains a Zacks #2 Rank, implying a short-term Buy rating on the stock. Our long-term recommendation for the stock remains Outperform.
Meanwhile, one of Ulta’s competitors, Regis Corp. (RGS) reported first quarter 2012 adjusted net earnings of 26 cents per share, missing our estimate by a penny.
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