Ulta's Shares Rise Sharply Following Its Second-Quarter Earnings Beat

Ulta Salon, Cosmetics, & Fragrance (NASDAQ: ULTA  ) is the largest specialty retailer of beauty products in North America, and it has recently announced first-quarter results to kick off fiscal 2014's earnings season. The company's stock has reacted by making a sharp move higher, so let's break down the results and its outlook going forward. We'll then check in on one of its largest competitors, Sally Beauty Holdings (NYSE: SBH  ) , to determine if we should be buying into this rally right now or if we should wait for a lower entry point.

Source: Ulta.

The quarterly results are in
The first-quarter report was released after the market closed on June 10. The results exceeded analysts' expectations on both the top and bottom lines; here's a breakdown:

Metric Reported Expected
Earnings Per Share $0.77 $0.74
Revenue $713.77 million $699.51 million

Source: Benzinga.

Earnings per share increased 18.5% and revenue increased 22.5% year over year, driven by comparable-store sales rising 8.7% and e-commerce comparable sales growing an incredible 72.3%. This growth led to e-commerce making up 8.7% of total sales compared to just 6.8% in the year-ago period.

Source: Ulta.

Gross profit increased 20.6% to $245.95 million and operating profit increased 19.5% to $80.88 million; in relation, the gross margin contracted 50 basis points to 34.5% and the operating margin contracted 30 basis points to 11.3%. The contraction of Ulta's margins can be attributed to a 23.5% increase in costs of goods sold and a 22.1% increase in selling, general, and administrative expenses.

In terms of expansion, 21 new stores were opened during the quarter, bringing Ulta's total store count to 696 in North America. This puts the company on pace to achieve its expansion goals for the year and puts it a little bit closer to reaching its long-term goal of 1,200 total stores.

In summary, it was a fantastic quarter for Ulta. The sentiment got even more bullish when the company reaffirmed its full-year outlook.

What will the remainder of the year hold?
In the report, Ulta also reaffirmed its growth expectations for the full year. Here's what it expects to accomplish:

  • Earnings per share growth in the mid-teens percentage range
  • Revenue growth in the mid-teens percentage range
  • Comparable-stores sales growth of 4%-6%
  • 100 net new stores
  • Free cash flow generation of approximately $100 million

Source: Ulta.

This is a solid outlook, and Ulta added that it expects earnings per share in the range of $0.78-$0.83 and revenue in the range of $706 million-$717 million in the second quarter; this would result in year-over-year growth of 11.4%-18.6% and 17.5%-19.3%, respectively. This was also in line with analysts' expectations of $0.82 in earnings per share and $704 million in revenue.

Overall, it was a phenomenal quarter for Ulta and its stock reacted accordingly by spiking more than 14% higher in the next trading session. This is a huge one-day pop, and I think that it more than prices in the good news. Because of this, I would urge Foolish investors to wait for the stock to come down a few points before pursuing new positions.

Sally Beauty is not seeing the same growth
Sally Beauty Holdings, the international retailer and distributor of beauty products, is one of Ulta's largest competitors in North America. It recently released earnings results of its own. Sally Beauty has been struggling to grow over the last few quarters, and this trend continued in the second-quarter report released in May:

Metric Reported Expected
Earnings Per Share $0.36 $0.39
Revenue $919.47 million $931.57 million

Source: Estimize.

Earnings per share remained unchanged, and revenue increased 2.4% year over year as comparable-store sales rose just 1%. All three of these statistics came in below analysts' expectations. 

Source: Sally Beauty.

Gross profit increased 2.7% to $456.4 million and operating profit declined 2.9% to $124.1 million, as the gross margin expanded 10 basis points to 49.6% and the operating margin contracted 70 basis points to 13.5%. These statistics were negatively affected by a 2% increase in Sally's costs of goods sold and a 4.5% increase in general and administrative expenses.

On a positive note, Sally Beauty repurchased about 2.1 million shares of its common stock for approximately $59.5 million during the quarter. There is about $331 million remaining on the company's $700 million repurchase authorization that was announced in March 2013.

In summary, it was a dismal quarter for Sally Beauty Holdings and its stock responded by plummeting 7.48% in the trading session that followed. The shares have continued lower in the weeks since, and I think there is more room to the downside; as such, I believe investors would be wise to avoid Sally Beauty indefinitely.

The Foolish bottom line
Ulta has just released strong first-quarter results, and its reaffirmed outlook calls for substantial growth going forward. The company's shares have reacted by rising more than 14% in the trading session following the release, but I do not believe this represents a rally that investors should buy into. Foolish investors should instead simply monitor the stock going forward and consider buying on any weakness.

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