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Ulta, Sally, or Regis: Who's Going to Have the Most Beautiful 2014?

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Ulta Salon, Cosmetics, & Fragrance (NASDAQ: ULTA  ) , Sally Beauty Holdings (NYSE: SBH  ) , and Regis Corporation (NYSE: RGS  ) are three of the largest salon service providers and beauty product retailers in the world. All three companies have reported earnings in recent weeks, with each report telling a different story. Let's take a look at the numbers and determine who is gearing up to have the best run over the next year.

The salon and beauty giants
Ulta is the largest beauty retailer in the United States, providing a one-stop shop for all the beauty and salon products and services a consumer could desire. The company is dedicated to providing the highest-quality products at affordable prices, which is the recipe for success in any industry. Ulta currently operates 664 stores in 46 states and it is expanding quickly.

Sally Beauty Holdings is an international retailer and distributor of professional beauty products. Through the Sally Beauty Supply and Beauty Systems Group businesses, the company sells and distributes over 10,000 products to more than 4,700 locations in 12 countries. 

Regis Corporation is the largest owner, operator, and franchisor of hair salons in North America and the United Kingdom. It operates or owns interest in 9,752 salons under names such as Regis Salons, SuperCuts, MasterCuts, and SmartStyle. It also sells haircare and hairstyling products in all of its locations.

The results
On Dec. 5, Ulta reported third-quarter earnings that missed estimates on both the top and bottom lines. Here's a breakdown:

Metric Reported Expected
Earnings Per Share  $0.72  $0.74
Revenue  $618.8 million  $621.9 million

Earnings per share rose 18.6% and revenue increased 22.4% year-over-year, driven by same-store sales growing 6.8%. Gross profit rose an impressive 24.9% to $231.66 million as the gross margin expanded 70 basis points to 37.4%. A quarterly record 55 new stores were opened during the quarter which brought Ulta's total to 664 stores in 46 states. Although these statistics missed the analyst estimates, I still believe Ulta had a very strong quarter.

The fourth-quarter report was released on Nov. 14 and the results were mixed compared to analyst expecations. Here's an overview:

Metric Reported Expected
Earnings Per Share $0.39 $0.39
Revenue $906.40 million $909.87 million

Earnings per share decreased 2.6% while revenue rose 2.7% year-over-year, as same-store sales grew just 0.4%. Gross profit rose 2.1% to $449.36 million even though Sally's gross margin declined 30 basis points to 49.6%. Gary Winterhalter, Sally's President and CEO, stated "Same-store sales comparisons were negatively affected by weakness in retail traffic and the record performance of 2012." I believe companies should build on top of record years, not use them as an excuse for poor performance later on. With that said, I believe Sally could get back on track soon enough with the help of its strong 49.6% gross margin.

On Nov. 5, Regis reported first-quarter results for fiscal 2014 that exceeded Wall Street's expectations. Here's a summary:

Metric Reported Expected
Earnings Per Share  $0.01  ($0.05)
Revenue  $468.80 million  $461.56 million

Regis' earnings per share decreased 87.5% and revenue decreased 7.3% year-over-year. These weak statistics were due to same-store sales declining 5.4%; in this, same-store service sales fell 3.1% and same-store product sales fell 14.8%. Regis' President and CEO, Dan Hanrahan, said that a new point-of-sales system was added, field leadership was reorganized, and standardized retail planograms were created during the quarter to help stabilize the falling sales. Regardless of the expectations, this was an ugly quarter loaded with negative growth.

Updated outlooks
In earnings reports, companies usually provide updated guidance for the next quarter or for the full year; Ulta and Sally Beauty did just this, but Regis does not participate in the practice. Here's what Ulta and Sally had to say, and what analysts expect from Regis:

To add to the disappointment of an earnings miss, Ulta cut back its outlook for the fourth quarter. Ulta now expects to earn $1.07-$1.10 per share when analysts expected $1.24. The company expects revenue in the range of $853 million-$867 million while analysts wanted to hear $895 million. The new expectations are much weaker than the company originally projected. Ulta stated that the decrease was a result of "softer retail sales trends at the end of the third quarter which are expected to continue." This is the weakest guidance I have ever seen out of Ulta, as it calls for earnings growth of just 7%-10% from a year ago.

In its release, Sally Beauty gave vague guidance for fiscal 2014. The company expects same-store sales growth of 1%-3%, with "gradual sales improvement" in the United States. Other noted statistics included: gross margin expansion of 30-40 basis points, unallocated corporate expenses of $135 million-$140 million, and capital expenditures of $85 million-$90 million. I am not a fan of this guidance because it does not directly spotlight or focus on what investors truly care about, earnings per share and revenue expectations.

For the second quarter of fiscal 2014, analysts expect Regis to report earnings per share of $0.02 and revenue of approximately $467.22 million. These estimates call for earnings to decrease by 33.3% and revenue to fall 7.7% year-over-year. Another disappointing quarter seems to be in the mix for Regis, which does not help its case for being an investment-worthy company.

And the winner is...
After reviewing the latest earnings reports and guidance provided by management, the winner of this three-way matchup is Ulta. Ulta's growth sets it apart and it is the only company with highly positive year-over-year results. Sally Beauty and Regis seem to be doomed to trade sideways for the next several quarters, unless each can make significant changes to increase their customer traffic.

The Foolish bottom line
Ulta Salon, Sally Beauty, and Regis are all great American stories, but do not all make for great American investments today. Ulta is my favorite of the three and I believe it has the potential to widely outperform the overall market in 2014. It has pulled back more than 18% since reporting earnings and is over 27% below its 52-week high, so this may be the opportunity value investors have been waiting for. Keep a close eye on Ulta and consider buying if weakness continues.


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