Why Ulta Shares Tumbled

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Ulta Salon (NASDAQ: ULTA  ) were getting beaten with the ugly stick today, falling as much as 16% after the beauty products chain provided disappointing guidance in its quarterly report.

So what: Ulta actually beat earnings estimates slightly, posting an EPS of $1.00 against expectations of $0.98, and revenues of $758.8 million were in line with estimates. Sales grew 30.3% in the quarter, though they benefited from an extra week in the quarter, while same-store sales jumped 8%. For the current quarter, Ulta sees sales growth of about 21%, to $568 to $577 million, EPS of $0.60-$0.63, and a comparable sales increase of 4%-6% for both the year and the quarter. Analysts had expected earnings per share of $0.72, however,

Now what: Today's drop seems a little steep, but we've seen this pattern before with high-priced growth stocks. Ulta still carries a high price tag at a P/E of 28, but with 125 new stores planned this year -- a 22% increase in the base -- it would seem to be growing fast enough to justify the markup. Ulta also received a downgrade from Oppenheimer in the wake of yesterday's report, but I'd tend to see today's drop as a buying opportunity. This is a company that expects long-term EPS growth of 25%-30% and seems to have a plan to deliver.

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