Ulta: Is This Your Opportunity to Buy?

Ulta Salon, Cosmetics, & Fragrance (ULTA 0.09%) fell hard after reporting earnings on Dec. 5 and the stock has yet to regain its strength. It had been up over 29.5% year-to-date on Nov. 5, but has fallen over 28% since then. Ulta is now negative for the year, falling about 7% as the S&P 500 has risen more than 24%. Let's take a look and see if this is an opportunity to buy relative to peers Sally Beauty Holdings (SBH -0.39%) and Regis (RGS -3.55%). 

The beauty retail giant
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 over 650 locations in the United States, along with its very popular website, www.ulta.com.

The results
After the close on Dec. 5, Ulta reported third-quarter results that disappointed analysts. Here's an overview of the report:

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, bringing Ulta's total to 664 stores in 46 states. Even though these metrics missed the consensus estimates, it still made for a great quarter.

The cause of the decline
With all of these positive statistics aside, the true issue analysts and investors had with Ulta's quarter was its guidance 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 what the company originally projected and 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, so a large sell-off was warranted. 

Steep sell-off
Prior to the earnings release, Ulta's stock was trading at $118 a share. After the results were announced, Ulta's stock was hit hard, dropping about 18% after-hours and finishing down 20.54% in the trading session that followed. The stock price continued its decline over the next several days, but it has rebounded slightly and currently sits roughly 20% below the $118 mark. 

How cheap is it?
At current levels, Ulta is trading about 31 times current earnings and 24.7 times forward earnings. According to YCharts, Ulta's five-year average price-to-earnings ratio is 35.73, meaning it is much cheaper than usual today. A smaller multiple is warranted today due to the dismal earnings that will come in the fourth quarter, but this is not the case in the long-term picture. I believe Ulta could consistently trade at a multiple of 30-32 until its growth slows several years from now.

(RGS -3.55%)

Ulta, Sally, and Regis have all reported earnings over the last several weeks, so here's a comparison of what each company accomplished in the recent quarter:

There really is no competition for Ulta when it comes to Sally Beauty and Regis, and the numbers show it clearly. I believe Sally and Regis are untouchable in the market today and both need to make major moves to change this opinion. It is always best to follow the consumer when it comes to the beauty products and services industry, and consumers are shopping at Ulta. 

A French powerhouse
Sally and Regis are showing little traction in the marketplace today, but Sephora has been growing consistently for the last several years. Sephora is one of the largest fragrance and cosmetic companies in the world, and it is the largest competitor to Ulta. The company deems itself the market leader in France, Italy, and Russia, and has growing presences in North America, China, Latin America, and the Middle East. Sephora is owned by Louis Vuitton Moet Hennessy (LVMUY -0.91%) and currently operates 1,413 locations.

Louis Vuitton does not give results for Sephora specifically in its earnings reports, instead it talks about Sephora as a part of its selective retail segment. In the first nine months of 2013, revenue from selective retail rose 15.9% to 6.32 million euros compared to 5.45 million euros in the same period in 2012. The company added that Sephora has a "growing market share in all key regions" and it is showing strong growth in online sales. At this time, it seems that Sephora and Ulta are growing in harmony, so I do not see the two as threats to each other. However, if Sephora sets its sights on rapid North American expansion, we would have a much tougher decision to make.

The Foolish bottom line
Ulta is still the long-term growth story we saw it as earlier this year, but the promotional environment this holiday season has made its run higher a little more challenging. It has sold off dramatically since missing earnings in early December, but I think this is merely a speed bump and Ulta will regain strength quickly. I believe the decline of over 20% is an opportunity for an investor to initiate a position and add to it if the decline persists.