Ulta or Sally Beauty: Which Retailer Posted the Prettier Quarter?

Ulta Salon, Cosmetics, & Fragrance (NASDAQ: ULTA  ) and Sally Beauty (NYSE: SBH  ) are two of the largest beauty products retailers in the world and they have both recently released their quarterly results. The stocks initially reacted by making sharp moves higher, but they have gone in different directions in the weeks since their respective releases. Let's break down the reports to determine which had the better quarter and which could provide the highest returns for investors from this point forward.

The quarterly results

Source: Ulta's Facebook

Ulta released its fourth-quarter report for fiscal 2013 on March 13 and the results came in above analysts' estimates; here's a breakdown and a year-over-year comparison:

Metric Reported Expected
Earnings Per Share $1.09 $1.07
Revenue $868.08 million $856.38 million

Source: Benzinga

Ulta's earnings per share increased 9% and revenue increased 14.4% year-over-year, as comparable-store sales rose an impressive 9.2%. Gross profit increased 13.1% to $293.56 million and the gross margin took a slight hit, declining 40 basis points to 33.8%. Ulta opened 11 new stores during the quarter to bring its total store count to 675, with all of its stores located in the United States. The stock reacted to these results by rising more than 6% in the next trading session that followed the release and it has continued rallying in the weeks since then.

Source: Fool Flickr

On Feb. 6, Sally released its first-quarter report for fiscal 2014 and the results were mixed in comparison with expectations; here's a breakdown and a year-over-year comparison:

Metric Reported Expected
Earnings Per Share $0.35 $0.36
Revenue $940.46 million $934.26 million

Source: Benzinga

Sally's earnings per share increased 9.4% and revenue increased 3.9% year-over-year, driven by comparable-store sales growth of 2.2%. Gross profit increased 3.6% to $460.53 million and the gross margin took a small hit, declining 10 basis points to 49%. Sally opened 24 new stores during the quarter, bringing its total store count to 4,693 worldwide. The stock reacted to these earnings results by jumping more than 7% higher in the trading session, but it has been all downhill since then as the stock has given back nearly all of its gains.

Outlook on the quarters ahead

Source: Ulta

In its report, Ulta also provided its guidance for fiscal 2014; here's what the company expects the year will hold:

  • Earnings per share growth in the mid-teens percentage range
  • Revenue growth in the mid-teens percentage range
  • Comparable-store sales growth in the range of 4%-6%
  • The openings of 100 net new locations
Ulta added that it expects to generate free cash flow in excess of $100 million, which will allow it to accomplish its expansion plans. The projected openings of 100 new stores would bring its count to approximately 775 and the company also noted that it believes it can build out its supply chain to support 1,200 stores in the United States; this would result in a 77.8% increase in its store count from today. Although we had become accustomed to seeing Ulta show growth of 20% each quarter, its outlook would still result in a solid year and its expansion plans set it up for continued success.

Source: Sally Beauty

Sally Beauty does not participate in the practice of providing an outlook, so we will use the consensus analyst estimates for the second quarter for argument's sake; here are those estimates:

Metric 2Q 2014-Analyst Estimate 2Q 2013-Reported
Earnings Per Share $0.39 $0.36
Revenue $932.36 million $898.24 million

Source: Estimize

These expectations would result in earnings per share increasing 8.3% and revenue increasing 3.8% year-over-year; if these were to come true, the results would look very similar to the results we saw in the first quarter. Sally does plan to continue its share repurchases over the next several quarters and this will help drive its earnings-per-share growth to achieve analysts' expectations. Also, the company will likely continue to expand its store base to help drive revenue higher and give itself greater exposure to the world's beauty market.

The French powerhouse we can't forget

Source: Sephora's Instagram

Before we choose a winner, we must also shed light on how a very large competitor in the industry performed in its most recent quarter and fiscal year. Sephora, which is owned by Louis Vuitton Moet Hennessy (NASDAQOTH: LVMUY  ) , is the largest beauty retailer in France, Italy, and Russia and it also has growing presences in the United States, Latin America, Middle East, and China. The company reported its earnings results on Jan. 30, so let's take a look at how its selective retail segment, which includes Sephora, performed:

Time Frame & Metric 2013 2012
Fourth-Quarter Revenue 2.622 billion Euros 2.427 billion Euros
Full-Year Revenue 8.938 billion Euros 7.879 billion Euros

Source: Louis Vuitton Moet Hennessy

The segment's revenue increased 8% in the fourth-quarter and 13.4% for the full-year of 2013 in comparison with 2012. The company noted that Sephora achieved sales growth and market share gains in all of its regions and it has been innovating to keep this trend going. Sephora now has over 1,300 locations worldwide and it has an expanding base of over 300 locations in North America. If Louis Vuitton were to spin Sephora off into a separately traded public company, it might become the company to own in the industry. However, until that time, there can only be one pure-play champion in the beauty industry... 

Source: Ulta

And the winner is...
After reviewing the quarterly results and outlooks on the quarters ahead, Ulta wins this match-up. The company reported substantial gains in the fourth quarter and I think the 9.2% comparable-store sales growth with a small margin hit was very impressive given the highly promotional holiday season that Ulta faced. Also, Ulta's expansion plans would allow for immense growth in the years ahead.

Sally Beauty had a good quarter, but its growth has slowed quite a bit over the last few quarters and I do not feel it will provide a long-term return close to that of Ulta. Foolish investors who seek an investment in the beauty industry should dig deeper into Ulta, because the rally is potentially just getting started.

Ulta represents a very good opportunity today, but still, there's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

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Joseph Solitro

A fan of innovation, strong fundamentals, and all things baseball. Follow on Twitter @JoeySolitro. Fool on!

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