Surprising Information You May Have Missed In Ulta's Latest Conference Call

Ulta Salon  (NASDAQ: ULTA  )  recently reported third-quarter results that missed analyst estimates on both the top and bottom lines. To add insult to injury, the company reported weaker-than-expected guidance for the fourth quarter. All of this caused the stock to decline over 20% in the next trading session and has left investors scratching their heads. Let's take a brief look at the earnings report and see what management had to say about the quarter to determine if this is a buying opportunity or if we should stay away. 

The beauty retailer
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 locations in the United States, along with its very popular website, www.ulta.com.

Source: Ulta.com. 

Overview of the results
After the market closed on Dec. 5, Ulta reported third-quarter results that missed the consensus estimates. Here's a summary of the results:

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 growth of 6.8%. Gross profit rose an impressive 24.9% to $231.66 million, as its gross margin expanded 70 basis points to 37.4%, a quarterly record. 55 new stores were opened during the quarter, showing that expansion is still a primary focus of the company. Although the reported statistics did not meet the consensus estimates, it was still a very strong quarter for Ulta. 

Insights from the conference call
An earnings report tells a great story about what happened over the last three months, but the conference call that follows provides the story that matters. A conference call can offer a forum for management to gloat or brag about a successful quarter, or it can try to calm investors and make excuses for what went wrong. In Ulta's case, management seemed satisfied with the earnings results, but still had some explaining to do when it came to weak guidance for the fourth quarter:

"We achieved slightly less gross margin expansion than we planned as a result of our increased level of promotion to drive sales late in the quarter... The current trend in the business and the overall heightened promotional environment for the holiday season are making us more cautious on earnings expectations for the fourth quarter and heading into next year." --Mary Dillon, CEO.

"We are still in the process of making decisions for 2014 to deliver the best possible results while investing for the future. However, assuming industry growth dynamics remain unchanged and a less certain consumer macro environment continues into next year, we believe it is prudent to plan for earnings growth similar to 2013, as we may have to maintain a more promotional posture to maintain market share gains." --Scott Settersten, CFO

During the conference call, the word "promotion" came into play much too often, as you can see above. This scares me because it is basically saying that the company must continue to offer massive discounts like it did on Black Friday and Cyber Monday to keep sales going. Promotions, discounts, giving away free products, and free shipping for online purchases eats into profits and will cause the company's gross margin to take a hit. Perhaps Ulta can work more with its suppliers to share the burden, rather than trying to shoulder the load on its own. Overall, I do not like what management is saying, and I hope it does finds ways to work around this "promotional environment."

Competitor comments
Sally Beauty Holdings (NYSE: SBH  )  is an international retailer and distributor of professional beauty products. The United States is its largest market, making it a direct competitor to Ulta. Its recent quarter showed EPS decreasing 2.6% and revenue rising 2.7% year over year, as same-store-sales grew just 0.4%. In the conference call that followed, CEO Gary Winterhalter had this to say:

"In summary, 2013 was a challenging year due to comparisons to our record growth in 2012 and soft traffic in our Sally U.S. retail business."

"We expect 2014 to be a year of gradual recovery for the Sally U.S. business as our customer acquisition program gains traction and our year-over-year comparisons get easier... We expect consolidated same-store sales growth of 1% to 3%... On a longer-term basis, we believe that the consolidated same-store sales growth should be in the range of 3% to 4%."

"We are happy to have 2013 in the rearview mirror and look forward to opportunities in 2014." 

The issue I have with Sally Beauty is that the company continually looks at the record year of 2012 as if it were some kind of fluke performance. I believe companies should build on top of record years, not use them as an excuse for poor performance later on.

In addition, Ulta's management seems much more bullish on the future, even with the threat of deep discounts being needed to maintain sales trends. With this said, Sally's year-over-year results were poor and comments in the conference call were not promising either, so I would steer clear of it for now.

The Foolish bottom line
Ulta has been one of the best growth stocks in the market over the last several years. Its earnings miss caused a decline of over 20%, and I believe this will eventually lead to a buying opportunity for investors. This seems to be the case because its expansion plans are still in place and this will continue to drive earnings higher, regardless if it meets analyst expectations or not in a given quarter. Investors should consider initiating a position if the stock continues to decline, but do not try to catch a falling knife. Pick a price that you believe is reasonable, and if the stock reaches that level, pull the trigger. As always, Foolish investors should make their own decisions before making any investment decisions. 

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