Retail stocks have rallied this year, but Ulta Beauty (NASDAQ:ULTA) feels like it’s been a bit left out. At its Thursday after-hours price of $233, Ulta stock has gained just 4.2% so far this year.
Meanwhile, more challenged retailers like Abercrombie & Fitch (NYSE:ANF) (even after a big post-Q2 sell-off) and Ascena Retail Group (NASDAQ:ASNA) have gained nicely. Ulta stock has outperformed its smaller rival, Sally Beauty Holdings (NYSE:SBH), but most retailers have had a much better 2018.
That actually makes some sense. A strong economy and a growing sense that Amazon.com (NASDAQ:AMZN) isn’t going to wipe out the entire brick-and-mortar universe should do more to help struggling stocks than strong ones. Still, investors seem less interested in the quality stocks in the sector, and that includes Ulta Beauty.
With Ulta stock down about 4% in after-hours trading Thursday, that trend has continued. But from here, it sets up a nice opportunity to go long Ulta.
Q2 earnings were solid, and while Q3 guidance looks modestly disappointing, this still is a company growing EPS 20%+ for the full year. The long-term growth profile looks equally solid.
Meanwhile, the pullback leaves Ulta stock 11% below its recent highs and at a very attractive valuation. I still think this is one of the best retailers in the country. After Q2 earnings, the only that has changed is the price.
Ulta Earnings
In terms of Q2 earnings, the news looks pretty good. Revenue of $1.49 billion rose 15.5% year-over-year, in line with expectations. Same-store sales rose 6.5% – a torrid performance in a sector where ‘good’ companies are growing 1-2%. Ecommerce sales rose 38%, as Ulta continues to build out its DTC (direct to consumer) business.
EPS of $2.46 was up 34% year-over-year – and came in $0.05 ahead of Street estimates. About 20 points of the growth came from tax reform, admittedly, and operating margin did decline 100 bps year-over-year. But Ulta is investing in its supply chain and stores (including wage hikes), and the 13% margin remains among the highest in the space.
As far as Q2 numbers go, there’s nothing to suggest any change in the underlying story here. Where investors seem concerned is in Q3 guidance. Ulta is expecting revenue of $1,550-$1,563 million, better than consensus of $1.54 billion. But EPS looks disappointing, with a range of $2.11-$2.16 comparing negatively to the Street’s $2.31.
That in turn seems to put a lot of pressure on Q4: the company would need to grow EPS 32% in that quarter to meet current full-year estimates.
That said, even the 4% sell-off looks like a bit of an overreaction. Ulta traditionally guides conservatively (Q2 EPS actually beat the high end of its guided range by $0.06). 32% growth in Q4 isn’t that aggressive given continued help from tax reform (albeit for only two months that quarter).
More broadly, while investors are focused on near-term expectations, they may be missing the long-term story here.
Ulta Stock Looks Cheap
At the after-hours price of $233, backing out over $6 per share in cash, Ulta now trades for less than 21x FY18 consensus EPS and less than 18x FY19 estimates.
That’s only a modest premium to the retail sector as a whole and about in line with the entire market. That’s true even if those estimates come down a few pennies after Q2. But this is not a story that is like that of other retailers or other companies.
Again, Ulta posted 6.5% comparable-store sales on top of 11.7% last year. Most retailers are happy to get positive comps of any kind this year, with many comparing against year-prior declines. Even with tax reform, few companies are growing EPS 20%+ this year – or another 15%+ next year.
Ulta still estimates that it has just 4% market share; a tiny figure in a fragmented industry and one that suggests plenty of growth going forward. Ecommerce demand will continue to rise. The company can add more stores. Ulta probably is going to grow for years to come. And in this bull market, companies with years of growth ahead simply aren’t available for ~21x this year’s earnings or 18x next year’s.
And, really, Q2 didn’t change that story at all. If anything, it helped it. Expectations for the quarter were reasonably high – and Ulta beat them. Worrying about Q3 guidance in that context, and at this valuation, is something close to foolish. Savvy investors can take advantage.
As of this writing, Vince Martin has no positions in any securities mentioned.
