Ulta Salon Delivers Beautiful Results: Should You Buy?

Source: Ulta Salon.

Beauty retailer Ulta Salon, Cosmetics & Fragrances (NASDAQ: ULTA  ) was rising by 14.9% on Wednesday after delivering a glowing financial performance for the first quarter of fiscal 2014. Ulta Salon is clearly outperforming competitor Sally Beauty Holdings (NYSE: SBH  ) , and growing online sales show that the company is successfully adapting to the e-commerce revolution and keeping (NASDAQ: AMZN  ) at bay. Is it time to buy Ulta Salon?

Good-looking performance
Net sales during the quarter ended on May 3 increased 22.5% to $713.8 million; this was better than the $699.7 million expected on average by Wall Street analysts. Comparable sales were notoriously strong during the quarter, rising 8.7% versus the same period in the prior year.

Considering that Amazon has been a huge risk factor for retailers in different categories over the last several years, investors should take comfort in the fact that Ulta Salon is performing well in the online segment. E-commerce comparable sales grew 72.3%, representing 190 basis points of the total company comparable sales increase of 8.7%.

Gross profit margin decreased 50 basis points to 34.5% of sales from 35% in the first quarter of fiscal 2013, primarily because of channel mix shifts, an increased percentage of sales coming from the company´s ULTAmate Rewards program, and higher costs resulting from a larger number of new stores in the company's portfolio.

Net income per diluted share increased 18.5% to $0.77, versus $0.65 per share in the first quarter of the prior year and comfortably beating analysts' forecasts of $0.74 for the period.

CEO Mary Dillon sounded quite satisfied with the company's performance in the earnings press conference:

I am pleased to report a strong start to the year, with better than expected sales and earnings growth in the first quarter. The team's accomplishments included driving continued momentum in our online business, successfully rolling out new brands, completing the smooth conversation of our loyalty program onto one platform and closely managing inventory. 

Ulta Salon vs. Sally Beauty and
With a total of 3,477 stores as of the end of the first quarter of 2014, Sally Beauty Holdings is bigger than Ulta Salon. But Sally Beauty is clearly no match to Ulta when it comes to growth rates and overall financial performance.

Sally Beauty reported a lackluster sales increase of 2.4% to $919.5 million during the quarter ended on March 31, while same-store sales grew 1% versus the same quarter in the prior year. Management highlighted the negative impact from the "extremely unfavorable weather in the U.S." during the quarter, but this does not change the fact that Ulta Salon is clearly outperforming Sally Beauty by a wide margin.  

When talking about competitive risks in the retail industry, Amazon cannot be left out of the discussion. The online retailer has inflicted a lot of damage on players in various retail categories due to its efficient cost structure and aggressive competitive drive. Amazon has an undisputed natural advantage to compete online, a crucial growth area in the current retail environment.

But Ulta is proving that it has the competitive strength to successfully adapt to the online revolution while protecting the business from the challenge represented by Amazon and other online competitors.

Ulta offers a distinctive environment and the differentiated customer experience that only a specialized retailer can provide. Store design and decoration, a friendly team of sales associates who are noncommissioned to avoid excessive sales pressure, experiential boutiques and testers, as well as a team of licensed stylists and estheticians can make all the difference in the world for customers, and that's an enormously valuable differentiating factor for Ulta Salon.

The future
Ulta Salon opened 21 stores during the last quarter, ending the period with a total of 696 stores. Management expects to open a total of 100 new stores during fiscal 2014, representing an increase of approximately 15% in square footage.

Management believes it has room for nearly 1,200 full-size stores in the U.S. over the long term, and the company is also optimistic about the potential opportunities for growth in its new smaller store format.

Considering that total sales are rapidly growing, and that healthy same-store sales performance is showing that new openings are not cannibalizing sales at existing locations, demand strength is indicating that Ulta Salon is still far from reaching any level of market saturation point.   

The company has 13.4 million active loyalty members who shopped with Ulta Salon over the past 12 months, and customer loyalty can be a huge asset when it comes to successfully sailing through good and bad economic times in a business that is closely tied to discretionary consumer spending.

Foolish takeaway
Ulta Salon is delivering glowing performance while outperforming competitor Sally Beauty and expanding its online business in spite of the challenge that Amazon represents to most retailers. In addition, the company still has plenty of room for growth, and management is executing well. Beauty is in the eye of the beholder, but Ulta Salon looks quite pretty from this perspective.

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Andrés Cardenal

Andres Cardenal, CFA is a tenacious researcher of the best investment opportunities around the world. Andres is an economist and CFA Charterholder living in Buenos Aires, Argentina. Naturally flavored. Follow me on Twitter for more investment ideas:

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