Ulta Beauty Inc (ULTA) Rebounds After Great Q4 Earnings

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Optimism was high as trading closed March 9 and investors waited for the fourth-quarter earnings report from Ulta Beauty Inc (NASDAQ:ULTA) — especially after e.l.f. Beauty Inc (NYSE:ELF), another cosmetics company, rose 12% after reporting earnings the day before.

But ULTA stock didn’t enjoy the same hurrah — at least not at first.

Ulta — which changed its name from Ulta Salon, Cosmetics and Fragrance in January when it adopted a new holding company structure — was looking for revenue of $1.52 billion to $1.54 billion for the January quarter, and earnings per share of from $2.08 per share to $2.13. The “whisper number” on earnings was even higher, at $1.57 per share. The revenue would represent sales growth for the beauty chain of 12% to 14%, outstanding for a retailer.

The stock chart has been attractive, too, showing higher highs and higher lows for some time.

However, while everything seemed set up for success, ULTA stock was jabbed Thursday before making a wild turnaround on Friday.

Ulta by the Numbers

While impressive on their face, traders initially treated the numbers as a miss, taking down the stock more than 7% in after-hours trading, after trading it down slightly during the day. However, shares rebounded to 3%-plus gains on Friday after a bit of thinking, and optimism about the Street-beating February jobs report.

Ulta said it had earnings of $140.018 million, $2.25 per share, on revenue of $1.58 billion. Sales were up 24.6% year-over-year, and up 16.6% at stores open over a year.

The online side of the business grew an impressive 63.4%, but still represented just $154.9 million, a tiny fraction of the whole.

Net income was up 30% year-over-year.

Is ULTA Stock an Aging Play?

While makeup is often sold by attractive, young models, it’s used by aging oldsters, of both sexes. Anyone who has ever appeared on TV, including me, has had to wear makeup, more every year, and new HD cameras make that even more necessary.

Ulta was founded by veterans from Chicago’s Osco Drug chain, and is based in the Chicago suburb of Bolingbrook. It came public in 2007 at about $30 per share, and while it has paid only one dividend, in 2012, its value has increased over eight-fold to its recent level of about $274.

Ulta has really taken off since Mary Dillon, a former cellular chain with experience at McDonald’s Corporation (NYSE:MCD) and PepsiCo, Inc. (NYSE:PEP), became CEO in 2013. Revenues have doubled, to nearly $4 billion per year, and margins have held level, with about 8% of revenue hitting the net income line.

While other retailers have faded, Ulta has built out a network of almost 1,000 stores, most of them 10,000 square feet in size, almost as big as a Staples Inc. (NASDAQ:SPLS) office supply store. It’s both a sales and service business, with 20,000 products from 500 brands, as well as full-size salons serving hair, skin and eyebrow needs. (Yes, they have an Eyebrow Bar.)

Ulta represents a classic roll-up of what had been a very diffused industry. Think of it as a Staples for the face, a beauty superstore.

And a great way to hide the wages of age from your boss or the camera.

Why the Initial Bearish Reaction?

The reason might have been first-quarter guidance, which came in a range of $1.24 billion to $1.27 billion — just shy of expectations for $1.28 billion. But that’s a hair of a miss, and something that excellent operational results — and a $25 million share repurchase program announcement — should’ve overcome.

Instead, the reason might have been found in a trader’s bearish call from Monday, indicating that while Ulta is an impressive growth story, fair value could be as much as 40% below the current price. With a price-to-earnings multiple of 45, and a market cap of over $17 billion — more than 3 times sales — traders were looking to take profits.

Investors apparently looked upon this as a buying opportunity in ULTA stock when trading opened Friday morning.

Dana Blankenhorn is a financial and technology journalist. His latest novel is Bridget O’Flynn vs. Something Big & Ugly. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Tweet him at @danablankenhorn, connect with him on Mastodon or subscribe to his Substack.


Article printed from InvestorPlace Media, https://investorplace.com/2017/03/why-is-ulta-beauty-inc-ulta-stock-dropping-after-a-great-q4/.

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