Ulta Beauty (ULTA) View Up on Q2 Earnings Beat, Stock Gains


Shares of Ulta Beauty, Inc. (ULTA Quick QuoteULTA ) gained 4.7% in the after-market trading session on Aug 25, as the company posted splendid second-quarter fiscal 2021 results, alongside raising its fiscal 2021 guidance once again. During the quarter, both top and bottom lines advanced year over year and surpassed the Zacks Consensus Estimate.

Results were backed by robust brick-and-mortar traffic with more customers returning to stores, as well as efficient cost-curtailment endeavors. Management remains encouraged about its first-half performance, as well as with the third-quarter trends witnessed so far.

Despite the dynamic operating landscape and limited near-term visibility due to the pandemic, Ulta Beauty pulled up its sales, comparable sales (comps), operating margin and earnings guidance for fiscal 2021.

Quarterly Numbers

Ulta Beauty posted earnings per share (EPS) of $4.56, which came in considerably ahead of the Zacks Consensus Estimate of $2.49. In the second quarter of fiscal 2020, adjusted earnings per share was 73 cents. Earnings came in at $2.76 per share in second-quarter fiscal 2019.

Ulta Beauty Inc. Price, Consensus and EPS Surprise

Ulta Beauty Inc. Price, Consensus and EPS Surprise

Ulta Beauty Inc. price-consensus-eps-surprise-chart | Ulta Beauty Inc. Quote

Net sales of this beauty products retailer surged 60.2% year over year to $1,967.2 million and easily beat the Zacks Consensus Estimate of $1,792 million. The rise in sales can be attributable to increased consumer confidence and relaxation of pandemic-related curbs.

Comparable sales or comps soared 56.3% against the 26.7% slump recorded in the prior-year quarter.  This upside was fueled by robust growth in the brick-and-mortar channel, with more members returning to stores. Traffic increased sequentially, while it remained lower than the 2019 levels.

Comps take into account stores that were open for at least 14 months, including stores temporarily closed due to the pandemic and e-commerce sales. During the reported quarter, the company registered a jump in transactions of 52.5% and a rise of 2.5% in average ticket. Comps grew 13.1% from the figure reported the second quarter of fiscal 2019.

E-commerce sales declined from last year’s major increase, though it more than doubled from the 2019 level. Buy online, pick up in-store or BOPIS penetration remained high and formed 20% of total e-commerce sales in the fiscal second quarter, up from the preceding quarter’s 16%.

Gross profit advanced from $329 million to $798 million. Gross margin rose from 26.8% to 40.6% owing to enhanced merchandise margins, fixed cost leverage on higher sales, positive channel mix shifts and reduced salon costs.

SG&A expenses escalated from $271.6 million to $464.3 million in the second quarter of fiscal 2021. SG&A expenses (as a percentage of sales) flared up from 22.1% to 23.6% due to escalated store payroll and benefits and greater marketing costs, somewhat negated by corporate overhead and store expense leverage thanks to increased sales.

Operating income came in at $332.3 million and the operating margin was 16.9%. In the second quarter of fiscal 2020, the company had posted adjusted operating income of $54.9 million, with the adjusted operating margin coming in at 4.5%. This year-over-year growth can be attributed to sturdy sales growth (boosted by brick and mortar) and the positive impact of cost-containment efforts.

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Image Source: Zacks Investment Research

Other Updates

Ulta Beauty ended the second quarter with cash and cash equivalents of $770.1 million. Net merchandise inventories came in at $1,443.7 million. Stockholders’ equity at the end of the quarter stood at $1,879.8 million. Net cash provided by operating activities was $401.4 million for the 26 weeks ended Jul 31, 2021.

The company repurchased shares worth $243.5 million during the second quarter and worth $635.8 million in the first half of fiscal 2021. As of Jul 31, 2021, the company had $886.2 million worth of shares remaining under its $1.6-billion buyback program announced in March 2020. The company expects share buybacks of nearly $850 million in fiscal 2021.

Ulta Beauty’s capital expenditures amounted to $22.7 million during the second quarter. For fiscal 2021, capital expenditures are expected in the bracket of $225-$250 million.

During the reported quarter, the company introduced seven new stores, alongside relocating one, remodeling five and closing one. Ulta Beauty ended the quarter with 1,296 stores. For fiscal 2021, the company expects 44 net new stores, along with 18 store remodeling and relocation projects.

More Developments & Guidance

Ulta Beauty’s robust second-quarter show was backed by beauty category revival, along with the impact of the company’s prudent investments undertaken over the past year to adapt according to the market hurdles.  

The company witnessed higher market share in all core prestige beauty categories, alongside seeing strength in all main mass categories. During the fiscal second quarter, the company introduced wellness shops in certain stores as well as on ulta.com, to keep pace with customers’ growing inclination toward self-care.

Also, Ulta Beauty’s services business is seeing momentum and the company intends to relaunch skin services in certain stores during the third quarter. The company’s loyalty program is also witnessing speedy recovery. Apart from this, management is encouraged about the launch of Ulta Beauty at Target.

Management raised its fiscal 2021 view. It now expects net sales of $8.1-$8.3 billion, up from the $.7-$7.8 billion expected before. The Zacks Consensus Estimate is currently pegged at $7.9 billion. Comps growth is now expected in the range of 30-32% compared with the prior band of 23-25%.

Management expects operating margin to be nearly 13% now, up from around 11% projected before. Growth in operating margin is likely to be driven by an expansion in gross margin, which, in turn, is expected to benefit from fixed cost leverage, better merchandise margin, lower salon costs and reduced headwinds related to channel shift.

Earnings are now envisioned in the range of roughly $14.5-$14.7 per share, in comparison with the $11.5-$11.95 per share forecasted earlier. The Zacks Consensus Estimate is currently pegged at $12.41 per share.

This Zacks Rank #2 (Buy) stock has rallied 18.7% in the past three months against the industry’s decline of 12.2%.

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