Ulta Faces an Unprecedented Challenge for Q1 2020

Beauty and cosmetics specialist Ulta (NASDAQ:ULTA) has always been an outlier among retailers. Founded just before the era of e-commerce, the company has nevertheless navigated the rapidly changing landscape that Amazon (NASDAQ:AMZN) imposed. Yet if investors read the fine print for Ulta’s last earnings report, they would recognize that the upcoming quarters may be a make-or-break moment for Ulta stock.

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To recap, Ulta released its earnings report for the fourth quarter of 2019 a week before California issued its stay-at-home order for non-essential workers. Thus, the Q4 report was the last fiscal disclosure before the full impact of the novel coronavirus came to bear. In retrospect, this is somewhat foreboding for the upcoming Q1 2020 report, scheduled for release on May 28.

As our own William White noted, Ulta beat the earnings-per-share target of $3.73, instead delivering $3.89 in Q4. However, the company generated revenue of $2.31 billion, slightly missing expectations calling for $2.32 billion. But it was the guidance that saw Ulta stock sink.

While management praised its “enhanced omnichannel capabilities,” they guided adjusted EPS for the fiscal year 2020 from $12.55 to $12.75. This was notably below Wall Street’s consensus estimate of $13.06.

Making matters worse, the company emphasized that the outlook did not take into account the coronavirus’ impact. Listening to the conference call, I got the impression that they viewed the outbreak as a manageable challenge. Of course, they had no idea about the avalanche of pain that would drop on all of us.

But now, this really sets up a worrying situation for Ulta stock. If the cosmetics retailer doesn’t deliver, ULTA could go down in a hurry.

The Pressure Is on for Ulta Stock

For Q1, the narrative that management puts together will be crucial in determining where ULTA goes next. If it’s credible, perhaps shares can once again befuddle Wall Street, which mostly embraces the e-commerce revolution. If not, I don’t want to be near the coming train wreck.

First, let’s look at the numbers. Consensus EPS estimate sits at 66 cents. Not surprisingly, individual estimates vary wildly, ranging from a loss of 97 cents to $3.13. No matter what, the entire range is a far cry from the EPS of $3.26 from the year-ago quarter.

On the revenue front, covering analysts are looking for $1.3 billion. The estimate spectrum ranges from $984 million to $1.8 billion. Again, this is well off the reported $1.7 billion in sales from Q1 2019.

Clearly, what investors will be looking for is the resiliency of Ulta’s consumer base. With the quarantines, in-store shopping was out. But more critically, Ulta stock represents exposure to a successful “experience”-based business model. Shoppers can come in, sample various cosmetics and accessories, and figure out what products work best for them.

As well, you have a host of beauty experts that can guide consumers to the most appropriate options. Personally, I think this is nuts. But so many people swear by it and that’s ultimately what matters.

Therefore, not having this flagship catalyst will impact sales. But by what degree? This is where CEO Mary Dillon’s words about omnichannel capabilities may come back to haunt her. Let me be clear that this is not Ulta’s fault. Sadly, though, the coronavirus has rendered the company into a single-channel revenue stream.

In that scenario, Ulta’s advantage is gone. And that would leave Ulta stock vulnerable to online competition.

Uncertain Times Ahead

Frankly, it’s difficult to not have pessimism toward ULTA. Although most states are gradually reopening their economies, many states still impose relatively strict limitations. At time of writing, California is pushing to open high-contact businesses like restaurants, gyms and salons. But in the big cities like Los Angeles, this is still a no-no.

On the other hand, we’ve seen many instances where pent-up demand has delivered big gains. For example, when Georgia opened its restaurants and other businesses, out-of-state visitors came flying in (maybe not literally). If Ulta’s leadership team provides evidence that consumers are ready to hit their stores once the shutdowns are completely over, that could actually boost Ulta stock.

If so, the ultimate decider is the economy. Ulta specializes in premium beauty products, which isn’t a problem in a bull market. In a recession – or worse yet, a depression – that story changes dramatically. So, I’m going to sit on the sidelines. While I wish the company the best, there are too many variables for me to feel comfortable heading into earnings.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2020/05/ulta-stock-faces-an-unprecedented-challenge-for-q1-2020/.

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