Beautiful Performance by this Beauty Retailer

Ulta Beauty is performing very well, reflecting significant upside in future

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Ulta Beauty (ULTA, Financial) is the largest beauty retailer in the United States and the premier beauty destination for cosmetics, fragrance, skin care products, hair care products and salon services. Since opening its first store 25 years ago, Ulta Beauty has grown to become the top national retailer providing All Things Beauty, All in One Place.

The Company offers more than 20,000 products from over 500 well-established and emerging beauty brands across all categories and price points, including Ulta Beauty’s own private label.

Ulta Beauty also offers a full-service salon in every store featuring hair, skin and brow services. Ulta Beauty is recognized for its commitment to personalized service, fun and inviting stores and its industry-leading Ultamate Rewards loyalty program. As of July 30, Ulta Beauty operates 907 retail stores across 48 states and the District of Columbia and also distributes its products through its website, which includes a collection of tips, tutorials and social content.

The company recently announced a strong second quarter with excellent top and bottom line performance. The company witnessed continued rapid growth in its e-commerce business and successful execution of the supply chain investments.

Strong Second Quarter

Net sales during the quarter increased by 21.9% and were $1069 million, compared to $877.0 million in the prior year quarter.

Comparable sales (sales for stores open at least 14 months and e-commerce sales) increased by 14.4%, compared to 10.1% in the prior year quarter.

Retail comparable sales increased by 12.6%, including salon comparable sales growth of 8.0%.

Salon sales increased by 14.3% and were $59.0 million, compared to $51.6 million in the prior year quarter.

E-commerce sales went up by 54.9% and were $55.9 million, compared to $36.1 million in the prior year quarter. This represents 180 basis points of the total company comparable sales increase of 14.4%.

Gross profit increased by 110 basis points and was 36.0%, which was 34.9% in the prior year quarter.

Selling, general and administrative (SG&A) expense as a percentage of net sales increased by 110 basis points and was 22.1%, compared to 21.0% in the prior year quarter.

Pre-opening expenses increased to $4.7 million, compared to $4.1 million in the prior year quarter.

Real estate activity in the second quarter of fiscal 2016 included 24 new stores, one relocation and five remodels compared to 20 new stores, one relocation and two remodels in the second quarter of fiscal 2015.

Operating income increased by 21.4% and was $143.8 million, or 13.5% of net sales. Compare this to $118.5 million, or 13.5% of net sales, in the prior year quarter).

Net income increased by 21.3% and was $90.0 million, compared to $74.2 million in the prior year quarter.

Income per diluted share increased by 24.3% and was $1.43, compared to $1.15 in the prior year quarter.

Six Months Performance Highlights

Net sales increased by 22.8% and were $2142.9 million, compared to  $1745.1 million in the first six months of fiscal 2015.

Comparable sales (sales for stores open at least 14 months and e-commerce sales) increased by 14.8%, compared to 10.8% in the prior year period.

Retail comparable sales increased by 13.3%, including salon comparable sales growth of 7.9%.

Salon sales increased by 14.5% and were $117.9 million, compared to $102.9 million in the prior year period.

E-commerce comparable sales went up by 46.0% and were $116.9 million, copared to $80.1 million in the prior year period. This represents 150 basis points of the total company comparable sales increase of 14.8%.

Gross profit increased by 130 basis points and was 36.2%, compared to 34.9% in the first six months of fiscal 2015.

SG&A expense as a percentage of net sales increased by 70 basis points and was 22.3%, compared to 21.6% in the first six months of fiscal 2015.

Pre-opening expenses were equal to the first six months of 2015 at $7.2 million.

Real estate activity in the first six months of 2016 included 37 new stores, one relocation and five remodels compared to 44 new stores, two relocations and two remodels in the first six months of fiscal 2015.

Operating income increased by 28.7% and was $290.9 million, or 13.6% of net sales. In comparison, operating income was $226.0 million, or 13.0% of net sales, in the prior year period.

Net income increased by 29.0% and was $182.0 million, compared to $141.1 million in the prior year period).

Income per diluted share increased by 32.0% and was $2.89 (which was $2.19 in the prior year period.

Balance Sheet

Merchandise inventories at the end of the second quarter of fiscal 2016 totalled at $930.2 million, compared to $705.7 million during the prior year quarter.

Average inventory per store increased by 18.7%, compared to the second quarter of fiscal 2015.

The company had $304.1 million in cash and short-term investments.

Share Repurchases

During the second quarter, the company repurchased 107,725 shares of its stock at a cost of $25.8 million under its 10b5-1 plan and completed the accelerated share repurchase (ASR) under an agreement entered into in March 2016. Under the ASR agreement, the company paid $200 million and received initial delivery of 851,653 shares in the first quarter of 2016, which were retired and represented 80% of the total shares the company expected to receive based on the market price at the time of the initial delivery. In May 2016, the ASR settled and an additional 153,418 shares were delivered to the company and retired.

Year to date, including the ASR and activity under the 10b5-1 plan, the company has repurchased 1,270,552 shares at an average price of $198.69. As of July 30, approximately $193 million remained available under the $425 million share repurchase program announced in March 2016. (Source: Company Website)

Expectations

 Third Quarter Full Year
Net sales To be between $1072 million-$1090 million Â
Comparable sales for the third quarter of 2016, including e-commerce sales To increase by 11%-13% Â
Capex  To be around $390 million
Grow e-commerce sales  By around 40%
Achieve comparable sales growth  To be around 11%-13%

Initiatives

  • Employing multifaceted marketing strategy to increase brand awareness
  • Innovation
  • Growing e-commerce business
  • Investing in infrastructure
  • Expanding stores

Portfolio Improvement

It has a strong pipeline of relevant, innovative and often exclusive products to offer to the guests. ULTA added 26 significant new brands during the year 2015. It is demonstrating increased traction with the brand partners. Now the best performing brands- Urban Decay, IT Cosmetics, NYX, Redken, Too Faced, Tarte, Clinique, Lancôme, Beneft and the Ulta Beauty Collection. The company is gearing up with better formulations and packaging as well as an enhanced presentation in hundreds of its stores.

Conclusion

The company is making significant improvements in its growth strategy. The company is gearing up with its new pipeline of innovative products. With outstanding sales and earnings growth, it is benefitting from the powerful combination of strong consumer demand in the beauty category and Ulta Beauty’s highly differentiated product and service offering.

The company’s better mix of marketing strategies and investments in infrastructure are fuelling industry leading growth across its stores and Ulta.com.

It ended 2015 with a debt-free balance sheet and had $475.8 million in cash and short term investments. Throughout the year, it returned value to shareholders through stock repurchase program and bought back around one million shares for $167.4 million. The company is doing very well now and I think adding this company is going to create shareholder returns in the future also.

Disclosure: I do not hold any position in the company.

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