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A Few Reasons Why Ulta Salon Is a Good Buy

April 16, 2014 | About:

Ulta Salon, Cosmetics & Fragrance (NASDAQ:ULTA) is seeing solid improvements in revenue, earnings and comparable-store sales, but its shares are still down. So, one has to evaluate whether Ulta is a good opportunity after its drop or its peers such as Sally Beauty Holdings (NYSE:SBH) and Avon Products (NYSE:AVP) are better picks.

A Look at Ulta’s Performance

Considering the general weakness in the retail space, Ulta failed to top expectations on both top and bottom lines for the first time in six quarters with total revenue at $618.8 million, representing a 22.3% year-over-year jump. This was within management’s guided range of $613 million to $623 million.

The strong comps gain of 6.8% resulted in growth in revenue versus the same quarter last year. Comps growth was in the range of 5% to 7%, which was within management’s expectations. E-commerce channel witnessed 74% strong growth, contributing 170 basis points to comps. Strong growth of e-commerce shows that Ulta is creating a loyal set of online customers.

EPS surged 22% year over year to $0.72, excluding severance charges and retention costs, and within management’s expectation of $0.71 to $0.74 per share. But, this was below analysts’ expectation of $0.74 per share.

Growth Drivers

During the quarter, due to the loyalty sweepstakes program undertaken by the company, its active members under the program increased 18% year over year to 12.5 million. So, Ulta can expect to have more customers coming in at regular intervals to its stores.

Ulta expects 22% year over year increase in square footage for the fourth quarter and plans to open 125 new stores and seven remodeled stores. Going forward, for 2014, Ulta expects to increase square footage by 15% every year.

Competition Is Strong

There’s a competitive promotional environment and the current trend is irregular in the retail segment. As a result, Ulta is cautious regarding its guidance, which proved to be below the Street’s estimates. The company reported some impressive results with net sales in the range of $853 million to $867 million and comps growth in the range of 7% to 9%.

Ulta has outperformed Sally in almost all areas with consolidated net sales for the fourth quarter increasing just 2.7% to $906.4 million for Sally and comps growing just 40 basis points. EPS was at $0.38 as compared to $0.39 in the same quarter for previous year.

Going forward, driven by the recent awarding of the distribution rights to several well-known professional brands by Sally, it sees the potential to draw more customers in the U.S. Moreover, advertisements for these products are now in People StyleWatch magazine.

The comparison of third quarter results for Avon, Ulta and Sally Beauty illustrates Avon’s disastrous performance in sales through more than 6.2 million independent sales representatives, or reps. Total revenue for the quarter declined 7% year over year to $2.32 billion as a result of a 3% decline in active reps and 7% decline in total units.

In all regions, barring Europe, the Middle East and Africa, Avon is beleaguered with legal troubles, falling sales, unfavorable currency movements, and shrinking active representative’s sales that dipped on a currency-neutral basis across the board.


Hence, Ulta is by far the best performer in the beauty retail space in comparison to its peers. Both its revenue growth and comps growth are impressive. Ulta is expensive at a trailing P/E of 3, slightly more than the industry average of 27.25. So, looking at its impressive growth in the past and given its aggressive plan of growing square footage, it is an attractive investment option.

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