Three months back, the overall conditions were looking bad for beauty retailer Ulta Salon, Cosmetics & Fragrance (ULTA, Financial). Chuck Rubin, CEO at that time, decided to move on as the company’s outlook for the recently-concluded quarter was poor, which pushed Ulta Salon close to its 52-week low.
But presently, the stock is trading close to its 52-week high, which can be considered as a remarkable recovery. The company beat earnings estimates with its shares receiving a massive boost earlier this month, coupled with the fact that it has found a new, full-time CEO.
Not all positive about Ulta
But, everything is not as rosy as it seems on the surface for Ulta Salon. The company’s shares jumped up after beating earnings, but then, the estimates were already quite low. Analysts downgraded their earnings expectation for the company from an original expectation of $0.72 a share due to the fall in company’s estimate in the range of $0.60-$0.63 a share.
Therefore, the fact that Ulta exceeded its already low guidance by posting earnings of $0.65 a share cannot be considered as impressive. Moreover, the company once again failed to exceed or meet the analysts' expectation of $0.68 a share by posting earnings of only $0.64-$0.67 a share. In addition, its revenue guidance of $579 million to $589 million is far below the analyst’s expectation of $590.3 million.
But the stock is already trading at a rich valuation, so the focus is on whether Ulta can garner enough growth to justify its premium valuation.
Looking forward
According to the company, revenue should increase 21% from the year-ago period. So, if Ulta Salon touches even the mid-point of its own guidance that would be impressive. EPS is also expected to jump by a similar figure from the year-ago period. Although, these estimates are below analysts' expectations, they are impressive on an absolute basis.
However, same-store sale growth will be a sore point. Ulta Salon has forecasted its same-store sales growth of 4% to 6% for the ongoing quarter, far below the 9.3% growth it saw in Q2 last year. It’s quite obvious that growth rates cannot stay steadily high forever. Hence, considering this fact; the stock might not grow at the same pace.
While the prospects of the company are optimistic, but there is much work to be done to achieve a comfortable position. The company is opening new stores, and looks forward to add 125 new stores this year and add to its existing count of around 580, a growth of more than 25%. Moreover, last quarter, its e-commerce business grew impressively by 70%.
But, as mentioned earlier, the present valuation is on the higher side and with a new CEO coming in, it remains to be seen what the direction of Ulta is taking. If shares drop considerably, then there could be an opportunity to buy more shares as Ulta is still growing and making some impressive moves.
Strategies and competition
The company is on a rapid drive to expand by adding more merchandise to its stores, adding more brands and services, and also increasing the number of Clinique and Lancôme boutiques. Ulta Salon is entering the territory of Macy’s and J.C. Penney’s (JCP, Financial) Sephora.
Sephora is a well-known brand having a pretty wide presence in the U.S. Its presence inside J.C. Penney’s stores has certainly expanded its reach, and customers have embraced the store within-a-store concept well. J.C. Penney isn’t doing very well, but Sephora is performing strongly and going forward, this means that there is a lot of scope for Ulta Salon’s boutiques to grow as it keeps expanding.
These strong initiatives must help the company sustain its growth in the long run, but still, investors must keep a close eye on the company’s execution as it’s been missing estimates on guidance for the past two quarters.
Ulta is placed in a better position than peers such as Elizabeth Arden (RDEN, Financial), which doesn’t enjoy the diversity that Ulta has and is making a lot of healthy moves. Arden is mainly popular for its Prevage anti-aging creams, apart from celebrity fragrances, and is quite dependent on departmental stores for revenue. The company recorded a loss in its most recent quarter, and although it trades at a relatively cheaper 28 times earnings as compared to Ulta Salon, it is not a good bet.
Conclusion
Ulta Salon’s premium valuation over peers is due to several reasons such as its wide store presence, brand diversity, and ever growing revenue and earnings. But this is not the right time to buy the stock due to reasons mentioned above.
Taking into account all these factors, it is essential for investors to closely track Ulta Salon and look for any signs of weakness in the near-future. The company is still in the early stages of growth and is growing well, but this is not a good time to buy into this growth story.
