Ulta Salon, Cosmetics & Fragrance, Inc.’s (ULTA) share price fell 20.5% after it announced weak fiscal third quarter 2013 results on Dec 05, 2013. The company failed to meet the Zacks Consensus Estimate for both earnings and revenues.
Adjusted earnings of 72 cents per share increased 22.0% year over year but missed the consensus mark of 74 cents by 2.7%. An interest income recorded in the reported quarter as against an expense in the year-ago quarter drove the year over year earnings growth. However, both revenues and margins were sluggish in the quarter.
Including severance charges of 2 cents, earnings per share were 70 cents, up 18.6% year over year.
Revenues
Total revenue was $618.8 million in the third quarter, which climbed 22.3% year over year and was within management’s projected range of $613.0 million to $623.0 million. However, revenues missed the Zacks Consensus Estimate of $623.0 million which we believe was due to softer comps in the quarter.
Including the impact of e-Commerce sales, comps increased 6.8%, lower than 8.9% in the third quarter of fiscal 2012 and 8.4% in fiscal second quarter 2013. Comps growth was within management’s projected range of 5.0% to 7.0% increase.
However, e-Commerce sales improved in the quarter. During the quarter, e-commerce sales were up 74.4%, representing 170 basis points (bps) of the total company same store sales.
During fiscal third quarter of 2013, the company launched a completely redesigned website featuring responsive web design technology. The company also has expanded its e-Commerce fulfillment capabilities to a second distribution center, in Chambersburg, Pa.
Operational Highlights
Selling, general and administrative expense ratio increased 90 bps year over year to 24.2%. This reflects planned investments on new website, supply chain project and store labor expenses.
Preopening expenses increased 19.0% year over year to $7.5 million. Operating income was up 18.9% year over year to $72.9 million. Operating margin declined 30 bps to 11.8% due to higher operating expenses.
Financial Position
Ulta Salon ended the third quarter with cash and cash equivalents of $240.9 million down from $286.2 million in the previous quarter. Exiting the quarter, merchandise inventories stood at $582.3 million, up from $461.2 million at the end of the previous quarter.
Store Update
During the quarter, the company added 55 new stores, up from 49 stores in the year-ago quarter. The company added 10 Clinique boutiques and ended the quarter with 100 stores offering Clinique products. It also added 20 Lancôme boutiques and ended the quarter with 105 stores offering Lancôme products.
Under the company’s loyalty program, the number of active members increased 18% year over year to 12.5 million, partly driven by a loyalty sweepstakes program which added new customers.
For fiscal fourth quarter 2013, the company expects 22.0% year-over-year increase in square footage and plans to open 125 new stores and 7 remodeled stores.
Fourth Quarter Guidance
The company expects total revenue in the range of $853.0 million to $867.0 million in fiscal fourth quarter 2013, higher than $758.8 million reported in the year-ago quarter.
For the fourth quarter of fiscal 2013, the company expects comps growth in the range of 5.0% to 7.0%. Including easy comparisons due to the super storm Sandy and excluding the 53rd week (the extra week) in the fourth quarter of 2012, the company expects comps to increase in the range of 7.0% to 9.0%.
The company lowered its earnings expectation for fiscal fourth quarter 2013 due to softer retail sales trends at the end of the third quarter of 2013, which are likely to continue. It expects earnings in the range of $1.07 to $1.10 versus $1.00 per share earned in the fourth quarter of fiscal 2012 (including the benefit of extra week).
Fiscal 2013 and 2014 Guidance
For fiscal 2013, the company maintained its comps growth guidance in the range of 7.0% to 8.0%. Adjusting for the 53rd week in 2012, Ulta Salon expects earnings growth rate in the low 20.0% range lower than previous the expectation of 25.0%. In fiscal 2014, the company expects earnings to be flat year over year.
Other Stocks to Consider
The company presently has a short-term Zacks Rank #5 (Strong Sell). Some better-ranked stocks in the sector include CST Brands, Inc. (CST), Barnes & Noble, Inc. (BKS) and Marinemax Inc. (HZO). While CST Brands holds a Zacks Rank #1 (Strong Buy), Barnes & Noble, Inc. and Marinemax Inc. carry a Zacks Rank #2 (Buy).
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