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Ulta Beauty (ULTA) Displays Mixed Sentiments: Time to Hold?

Zacks Equity Research
Updated

Ulta Beauty Inc. ULTA stock’s performance has raised mixed sentiments among investors lately. The company’s robust earnings surprise history, a strong loyalty program, omni-channel growth, effective marketing initiatives and strength in prestige cosmetics underscore the inherent potential in the stock. However, the company’s recent decline in margins and deceleration in comps growth have raised concerns.  That said, let’s analyze the pros and cons of this Zacks Rank #3 (Hold) company.

Positive Surprise History

Ulta Beauty has a splendid surprise history. The company has delivered robust top and bottom-line results for more than three years. Notably, the stock has maintained its robust earnings beat trend for the 16th straight quarter in third-quarter fiscal 2017.

Results mainly gained from enhanced market share gains and benefits from solid offers at the company’s loyalty program. Further, growth across all product categories, particularly prestige cosmetics; solid marketing initiatives, outstanding e-commerce growth and continued progress at the company’s salon operations provided an impetus.

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Strength in Loyalty Program Drives Q3

One of the major sales drivers of Ulta Beauty’s third-quarter performance was its loyalty program. The company grew its Ultimate Rewards members by 21% to $26.4 million by the end of October 2017 aided by its excellent marketing and merchandising endeavors and in store-conversions. Moreover, sales per member, average member ticket, retention rates and frequency of shopping remained sturdy in the third quarter.

Growth of Online and Omni-Channel Bode Well

Ulta Beauty, known for its strategy of striking the right balance between online and physical stores has been able to garner goodwill in a short span and remained immune to the Amazon AMZN -dominated market.

Notably, the company registered whopping 62.9% growth in e-commerce sales in the third quarter driven by increase in online and mobile traffic. The omni-channel customers now form nearly 9.1% of the company’s loyalty members compared with 7.5% in the year-ago period. Further, management reiterated its fiscal 2017 e-commerce sales growth forecast to the range of 50-60%. Alongside, the company focuses on strengthening e-commerce business by enhancing supply chain capabilities.

Extensive Merchandise Offerings

Ulta Beauty has created a niche market on the back a wide range of beauty products it offers. The company’s business model, focused on “All Things Beauty, All in One Place”, makes Ulta a go-to destination for cosmetics and beauty product lovers. Further, the company remains keen on enhancing beauty products offerings along with store traffic with superior services.
Adding to its portfolio of prestige brands, the beauty retailer rolled out Estee lauder’s most popular MAC brand, which is the No. 1 prestige beauty products brand in the United States, this year. Also, the company plans to expand it to about 120 stores by the end of fiscal 2017.

Deterrents

Though the company’s fundamentals look strong, there were certain catch points that have been hurting investors’ sentiment. Among the drawbacks, the company’s top line missed estimates in the third quarter, which was its first in more than three years.. Further, the recent decline in both gross and operating margins, a slowdown in the rate of comparable store sales growth from the year-ago and sequential periods and a not so encouraging guidance for the fourth quarter are impediments. Consequently, shares of Ulta Beauty plunged 20.5% in the last six months wider than the industry’s dip of 1.6%.

Do Retail-Miscellaneous Stocks Grab Your Attention? Check These

Investors interested in the same industry may consider Hibbett Sports Inc. HIBB and Five Below Inc. FIVE. While Hibbett flaunts a Zacks Rank #1 (Strong Buy), Five Below carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Hibbett Sports delivered an average positive earnings surprise of 25.5% in the trailing four quarters. It has a long-term earnings growth rate of 2.2%.

Five Below posted an average positive earnings surprise of 15.5% in the trailing four quarters. In addition, it has a long-term earnings growth rate of 26.5%.

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