Ulta Beauty (ULTA) Q4 Earnings Miss, Issues FY18 Guidance

Ulta Beauty, Inc.’s ULTA earnings history has been consistently impressive with the company having delivered positive earnings surprises for more than three years. However, its bottom line lagged the Zacks Consensus Estimate in fourth-quarter fiscal 2017 while the top line met the consensus mark after a miss in the previous quarter. Also, management provided guidance for first-quarter and fiscal 2018. 

However, shares of the company lost 1.5% in after-hours trading on Mar 15.  Further, this Zacks Rank #3 (Hold) stock has declined 7.4% in the past three months, wider than the industry’s fall of 3.8%.

 

Q4 Numbers

Coming to numbers, Ulta Beauty posted adjusted earnings of $2.75 per share, missing the Zacks Consensus Estimate by a couple of cents. However, the metric rose 22.8% year over year. Earnings per share exclude a favorable impact of 65 cents from the tax reform related items.

Net sales of this cosmetics retailer increased 22.6% year over year to $1,937.6 million but were in line with the expectations. Excluding the effect from the 53rd week, the top line improved 15.7%. The year-over-year rise in revenues was driven by solid comps growth and e-commerce sales.

Comps (including stores and e-commerce) climbed 8.8% compared with 16.6% growth in the prior-year quarter. Comps growth came on the back of a favorable traffic and ticket along with store growth and a stupendous e-commerce improvement. During the fiscal fourth quarter, the company registered transaction growth of 6.2% while average ticket was up 2.6%.

Retail business (comprising retail and salon) witnessed comps growth of 4.2% including 3.2% improvement for salon. Sales for the salon business grew 17.2% to $73.7 million and excluding the effect from the 53rd week, it rose 8.7%. Also, Ulta Beauty saw a whopping 60.4% surge in e-commerce sales to $248.3 million, reflecting about 460 bps of the total comps growth in the quarter.

Gross profit improved 20.8% year over year to $658.3 million. However, the gross profit margin contracted 50 basis points (bps) to 34% due to deleveraged merchandise margins and one-time bonus payment with respect to tax reforms.

While adjusted operating income increased 19% year over year to $266.7 million, adjusted operating margin declined 40 bps to 13.8%. The contraction in operating margin was due to a fall in gross margin coupled with 60 bps rise in SG&A expenses as a percentage of sales. However, pre-opening expenses dipped 2.3% to $4.3 million.

Other Financials

Ulta Beauty ended fiscal 2017 with cash and cash equivalents of $277.4 million, short-term investments of $120 million and shareholders’ equity of $1,774.2 million. Merchandise inventories totaled $1,096.4 million, marking an increase of 16.1% from the year-ago period. Average inventory per store grew 5.3%.

Net cash provided by operating activities came in at roughly $778.2 million in fiscal 2017.

During fiscal 2017, the company bought back 1,503,545 shares for a total of $367.6 million. Additionally, the board has approved a new share buyback authorization worth $625 million on Mar 13, 2018. This new share repurchase program replaces the prior $425 million authorization approved in March 2017 wherein about $78.6 million remained outstanding as of Feb 3.

Store Updates

In the fiscal fourth quarter, Ulta Beauty opened 16 new stores. With this, the company stands to operate 1,074 stores at the end of fiscal 2017 while increasing its total square footage by 10% year over year.

Going forward, the company plans to open 100 net new stores plus remodel or relocate 17 outlets in fiscal 2018.

Outlook

Management issued guidance for fiscal 2018 and the first quarter. Ulta Beauty remains impressed with an year-over-year improvement in the top and bottom line owing to continued market share gains and benefits from strategic initiatives. Going forward, the company expects to use a part of the tax reform gains to invest in people, product innovations as well as other strategies to boost growth.

Further, Ulta Beauty implements a cost optimization plan to benefit the areas of indirect procurement, operational efficiency, real estate expenses and merchandise margins. This plan will likely fuel operating profit margin growth rate in the long run. However, in fiscal 2018, the operating margin is projected to decline at a modest rate. Also, the company remains encouraged to deliver industry leading results in the near term.

For fiscal 2018, the company expects total sales to grow in low teens’ percentage with comps growth (including e-commerce) in the range of 6-8%. In the meantime, the company continues to anticipate its e-commerce sales growth 40%.

Notably, Ulta Beauty expects to adopt Accounting Standards Update 2014-09, Revenue from Contracts with Customers, thereby contributing to sales by roughly $50 million and reduce the operating margin rate by nearly 20 bps. Further, the company plans to deleverage the operating margin rate in the band of 50-70 bps for the fiscal.

Consequently, management envisions GAAP earnings per share growth in the 20% range inclusive of nearly $500 million impact from share repurchases. Also, it assumes an effective tax rate of 24% for fiscal 2018.

This apart, Ulta Beauty intends to spend about $375 million toward capital expenditures this year compared with $441 million incurred last year.

For the fiscal first quarter, the company anticipates net sales in the $1,506-$1,519 million band compared with 1,314.9 million, delivered in the prior-year quarter. The Zacks Consensus Estimate is pegged at $1.52 billion. Comps including e-commerce sales are predicted to grow 6-7% compared with the 14.3% rise in first-quarter fiscal 2017.

Earnings per share for the impending quarter are expected within $2.43-$2.48 compared with $2.05 in the comparable quarter, last fiscal. The Zacks Consensus Estimate for the metric stands higher at $2.50 and is likely to witness a downward revision.

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