How Ulta Salon Can Reawaken Its Slumping Stock

Next Tuesday, Ulta Salon (ULTA 0.90%) will release its latest quarterly results. The beauty retailer was one of the most-followed growth stocks in the market in past years, but recently, it has run into some challenges that have sent its stock into a slump.

Ulta has followed the same pattern that we've seen with other high-growth stocks in the past, where even reasonably good performance hasn't proven to be enough to keep investors happy. But, after having gone through a tough few months, can the retailer get itself back on track? Let's take an early look at what's been happening with Ulta Salon over the past quarter, and what we're likely to see in its quarterly report.

Stats on Ulta Salon

Source: Yahoo! Finance.

Can Ulta Salon's earnings put the stock back on the right track?
In recent months, analysts have marked down their views on Ulta's upcoming earnings, knocking $0.10 per share from their April estimates, and almost as much from their calls for the current fiscal year. The stock has also looked ugly lately, falling about 5% since early March.

A good part of those losses came after the company's fourth-quarter earnings report in March. Even though Ulta beat estimates for that quarter, its guidance for the April quarter led to the above-mentioned downgrade in earnings expectations. Still, sales growth of better than 30% came from a combination of substantial expansion as well as same-store sales increases of 8%, and the company has the opportunity to sustain those growth rates well into the future given its current expansion plans.

The big challenge that Ulta faces is demonstrating that its in-store salons give it a competitive advantage that online cosmetics retailers can't match. That argument didn't stop Goldman Sachs from downgrading the stock earlier this week, especially given the massive amount of capital that Ulta has had to spend in order to boost its network of stores.

The key to Ulta's success is combining its cosmetics and salon business. By itself, hair-salon giant Regis (RGS -4.42%) has not only failed to come anywhere close to Ulta's levels of growth, but also isn't even profitable. Meanwhile, cosmetics-focused retailers Estee Lauder (EL -0.45%) and Elizabeth Arden (NASDAQ: RDEN) have done a better job than Regis of producing growth, but their valuations aren't more attractive than Ulta, despite having arguably less favorable long-term growth prospects. Ulta's secret is tackling both businesses and handling them well, and it needs to keep executing on that front in order to rebound.

In Ulta's report, watch for figures on how well the company is doing with its loyalty rewards programs. By enticing customers to keep coming back, Ulta has a better chance of maximizing its potential repeat business, and that's a must-have aspect for the beauty chain's long-term growth.

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