What Keeps Ulta Beauty (ULTA) Going in a Tough Industry?

Ulta Beauty Inc. ULTA is primed up to stand out in a backdrop where retailers continue to struggle tough competition from growth of online retailers. This fervor is mainly backed by its splendid surprise history, robust marketing initiatives and solid e-Commerce as well as omni-channel focus. Further, this Zacks Rank #3 (Hold) stock boasts a VGM Score of B, with a long-term earnings growth rate of 20%, which also highlights its inherent potential. Let’s delve deep to find out more.

Solid Surprise History & Outlook

This leading beauty retailer has been consistent with its performance, recording top and bottom-line beat for over three years now. Notably, the company maintained this robust trend in second-quarter fiscal 2017 as well, which marked its 15th straight quarter of earnings and sales beat. Results benefited from enhanced market share gains and solid loyalty program offers. Further, growth across all product categories, particularly prestige cosmetics, aided results. Additionally, the company continued to gain from strong marketing initiatives, outstanding e-Commerce improvement and continued progress at the company’s salon operations.

Moreover, comparable store sales (comps) improved double digit in the quarter driven by favorable traffic. Encouraged by the sturdy results, management perked up fiscal 2017 guidance. The company now expects to deliver comps growth (including e-Commerce) in the range of 10-11%, up from the old projection of 9-11%. Earnings per share growth rate is now envisioned in high-twenties percentage band, compared with mid-twenties percentage range guided earlier.

Loyalty Program Benefits Results

Ulta Beauty’s loyalty program was a key driver of sales in second-quarter fiscal 2017. Thanks to its excellent marketing and merchandising endeavors and in store conversions, Ulta Beauty increased ultimate rewards members by 23% to 25.4 million by the end of July. Further, the company added 1.4 new members in the second quarter, which took total new member count to 5 million in a year.

Notably, this helped the company raise market share in the beauty enthusiast space to 27%. Moreover, sales per member, average member ticket, retention rates and frequency of shopping remained sturdy. Management also stated that it expects ultimate rewards credit card to contribute significantly to the top line in the fourth quarter of fiscal 2017.

Online and Omni-channel Initiatives Gives an Edge

Ulta Beauty is known for its strategy of striking the right balance between online and physical stores. This is probably one of the reasons behind its garnering goodwill in a short span and also remaining immune to the Amazon-dominated market. Notably, the company registered whopping 72.3% growth in e-Commerce sales in second-quarter fiscal 2017, which reflects about 340 basis points of the total comps growth. This was driven by traffic growth of 73% which included a 104% surge in mobile traffic. Further, omni-channel customers now form nearly 8.8% of its loyalty members, compared with 7.2% in the same year-ago period.

The superb e-Commerce performance encouraged management to upgrade fiscal 2017 e-Commerce sales growth forecast to a range of 50-60%, from around 50% expected earlier. Alongside, the company is focused on strengthening e-Commerce business by enhancing supply chain capabilities.

Possible Deterrents

However, all is not well for Ulta Beauty. Shares of this cosmetics retailer lost 10.9% in a month, wider than the industry’s 4.9% fall.

While the company is fundamentally sound, the possible reason for the recent slowdown is the marginal top-line beat recorded in the second quarter. Further, the rate of comps growth decelerated from the year-ago period, which turned down investors’ enthusiasm. Additionally, the company’s limited global brand awareness, challenges related to cheaper alternatives and changing consumer preference remain ongoing concerns.

Nevertheless, we believe Ulta Beauty can easily overcome these headwinds on the back of robust growth strategies.

Looking for More Promising Stocks? Check these

Better-ranked stocks in the retail space include The Children’s Place Inc. PLCE, Five Below, Inc. FIVE and Sally Beauty Holdings, Inc. SBH, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Children’s Place has a long-term EPS growth rate of 9%. Further, the stock has returned 28.5% in the past year.

Five Below has gained a nearly 20.1% year to date. Moreover, it has a long-term earnings growth rate of 28.5%.

Sally Beauty has a long-term EPS growth rate of 5.6%. Further, the stock has improved nearly 6% in the past three months.

Zacks' 10-Minute Stock-Picking Secret

Since 1988, the Zacks system has more than doubled the S&P 500 with an average gain of +25% per year. With compounding, rebalancing, and exclusive of fees, it can turn thousands into millions of dollars.

But here's something even more remarkable: You can master this proven system without going to a single class or seminar. And then you can apply it to your portfolio in as little as 10 minutes a month.

Learn the secret >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

To read this article on Zacks.com click here.

Zacks Investment Research