Why Ulta Salon, Cosmetics & Fragrance Shares Tumbled

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What: Shares of Ulta Salon, Cosmetics, & Fragrance  (NASDAQ: ULTA  ) were getting beaten with the ugly stick today, falling as much as 22% after a disappointing earnings report.

So what: The beauty-salon chain said adjusted earnings per share grew 22% to $0.72, but that was short of estimates at $0.74. Meanwhile, revenue improved 22.4% to $618.8 million, in line with expectations, and same-store sales increased 6.8%, including e-commerce sales. CEO Mary Dillon said the company delivered "solid top-line growth despite a challenging environment," but weak guidance seemed to spook investors. Ulta sees revenue of $853 million to $867 million for the current quarter, below the consensus at $894.8 million, and EPS of $1.07 to $1.10, short of estimates at $1.24.   

Now what: Management cited softer retail trends at the end of third quarter for the lowered guidance in the key holiday quarter, and said it plans to use steep promotions to gain market share during the gift-giving season, which will put a dent into profit margins. Today's sell-off seems to be typical Wall Street shortsightedness as the report does not change the company's long-term outlook. The salon chain is still poised for long-term growth as it plans to nearly to double its store count, and same-store sales are growing at a steady pace. I'd expect shares to bounce back in time.

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