Ulta's Holiday Performance Remains Uncertain

While its ultimate motives are unclear, Ulta Salon, Cosmetics & Fragrance  (NASDAQ: ULTA  ) has reversed course from its typical ways by not releasing holiday sales results after disappointing investors in early December with a subdued growth outlook. The retailer is remaining mum on holiday sales, thus leaving investors concerned that the company may not have much positive news to share.

Ulta's growth overview
Since the 2010 fiscal year, Ulta experienced a 76% increase in sales as it undertook a program to expand operations through increased square footage and a focus on driving brand awareness. In 2011 and 2012, store square footage grew at a rate of 16% and 23%, respectively. Comparable-store sales registered impressive results as well with CEO Chuck Rubin at the helm, having grown at 11% and 9%, respectively, over the same periods. Top-line growth continued in the first three quarters of the 2013 fiscal year, with comparable retail store sales increasing 6% and e-commerce results trumping that number quite profoundly at 72%. Appropriately, share prices gained steam throughout 2013, even with both the CEO and CFO resigning early in the year. As Ulta executed its growth plan, shares returned 78% from March 2013 lows to the year high in November.

Changing leadership equals changing commentary
Recent earnings transcripts provided an indication that newly-appointed CEO Mary Dillon was handed a growth-at-any-cost company when taking the reins in mid-2013. Ulta's most recent earnings call alludes to this possibility as well. Notably, she commented "I've also seen we need to upgrade our capabilities in certain areas which will require additional investment over a multi-year horizon in order to achieve our growth aspirations."

Ulta will be investing in employee training, building a new warehouse, and augmenting its supply chain to support broader expansion and continue at its forecasted 15% rate of square footage growth. Without such supporting capacity in place, growth can become unsustainable and adversely serve as a prime business case study in failed strategy.

Appropriately, Ulta reduced guidance during the earnings call after commenting that elevated holiday promotional activity will be necessary to drive traffic and will result in gross margin pressure. To Ulta's compliment, the company was quick to spot upcoming holiday trends and notify investors ahead of the changing landscape, rather than waiting until January, as did many large specialty retailers including L Brands  (NYSE: LB  ) and Signet Jewelers Ltd (NYSE: SIG  ) . Since November highs, Ulta shares are now 32% lower on profitability and sustainable top-line growth concerns.

Ulta holiday results
Investors have been left with little clarity on Ulta's growth trajectory after Ms. Dillon's earnings call commentary in December. Adding fuel to the fire is the fact that the company is reversing course and has not publicly released holiday sales results after having done so with clockwork-like consistency in early January of the past years. During periods when Ulta provided holiday details, results were quite rosy in SEC 8-K filings with comparable-store sales running in the high single digits or above (2011--13%, 2012--7%) and guidance either being reaffirmed or raised (2011 raised, 2012 reaffirmed.)

While it is unclear whether the silence is the result of newly enacted policies by the CEO or masking poor results, performance for specialty retailers throughout the holidays supports the latter. L Brands, the company behind apparel, beauty, and personal care product retailers Victoria's Secret and Henri Bendel, disappointed with  comparable holiday store sales that rose 2%. The company reduced EPS guidance by 12% due to lower margins on discounted merchandise and promotional activity.

Signet, which operates 1,400 jewelry stores domestically, was similarly affected. While comparable-store sales increased 8%, additional discounting was necessary to drive traffic that resulted in lower profitability expectations. Such results mirror those of Ulta, which reduced guidance on promotional activity pressuring gross margins to 37% in the third quarter, below guidance.

Foolish thoughts
Jumping to specific conclusions based on limited information can occasionally lead to incorrect assumptions. For this specific reason, it is quite difficult to ascertain the motives behind Ulta not publicly releasing holiday sales data in an 8-K filing. Recent operating results from peer specialty retailers would suggest that the reason is to mask poor operating results, although it may just be a new management policy to remove the company from the public spotlight. As a shareholder myself, I can respect the desire to keep quiet as the company shores up its operations and better aligns itself for sustained growth.

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  • Report this Comment On February 27, 2014, at 1:37 AM, ksoptionstrader wrote:

    Thanks for this article. However, you might want to check the transcripts from the last two conference calls (3Q and 2Q 2013). They specifically noted they changed their policy and will NOT release holiday sales data. Thus, their non-release is related to a change in policy announced about 4 or 5 months before it would have been released.

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