Ulta Salon, Cosmetics, & Fragrance (NASDAQ: ULTA ) and Sally Beauty Holdings (NYSE: SBH ) are two of the largest retailers of beauty products in the world, with more than 5,400 locations between them that did nearly $6.3 billion in sales in fiscal 2013. Both companies have recently released earnings for their respective quarters, so let's compare the companies' results and outlooks on the rest of fiscal 2014 to determine which had the stronger quarter and represents the better long-term investment opportunity.
Breaking down the beauties
On June 10, Ulta released its first-quarter report and the results exceeded analysts' expectations; here's a breakdown and year-over-year comparison:
|Earnings Per Share||$0.77||$0.74|
|Revenue||$713.77 million||$699.51 million|
- Earnings per share increased 18.5%.
- Revenue increased 22.5%.
- Comparable-store sales increased 8.7%.
- E-commerce comparable sales increased 72.3%.
- Gross profit increased 20.6% to $245.95 million.
- Gross margin contracted 50 basis points to 34.5%.
- Operating profit increased 19.5% to $80.88 million.
- Operating margin contracted 30 basis points to 11.3%.
- Expansion update: Ulta opened 21 net new stores during the quarter, bringing its total store count to 696 in North America.
Sally Beauty released its second-quarter report on May 1 and the results fell short of analysts' expectations; here's a breakdown and year-over-year comparison:
|Earnings Per Share||$0.36||$0.39|
|Revenue||$919.47 million||$931.57 million|
- Earnings per share remained unchanged.
- Revenue increased 2.4%.
- Comparable-store sales increased 1%.
- Gross profit increased 2.7% to $456.40 million.
- Gross margin expanded 10 basis points to 49.6%.
- Operating profit decreased 2.9% to $124.09 million.
- Operating margin contracted 70 basis points to 13.5%.
- Repurchased approximately 2.1 million shares of its common stock for $59.5 million.
- Expansion update: Sally Beauty opened 38 net new stores during the quarter, bringing its total store count to 4,731 worldwide.
What will the rest of the fiscal year hold?
Earnings results from the most recent quarter are always important to review, but from a long-term investment standpoint, we care more about where the company is going than where it has been or where it is right now; with this in mind, let's take a look at the companies' outlooks on the rest of 2014:
Following its strong first-quarter report, Ulta reaffirmed its growth expectations for fiscal 2014; here's a summary of what the company expects to achieve:
- 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%
- 100 net new stores
- Free cash flow generation of approximately $100 million
Sally Beauty did not update or reaffirm its outlook on fiscal 2014 following its weak second-quarter results, but I think it is safe to assume that the outlook provided in its fourth-quarter report still stands; here's a summary:
- Comparable-store sales growth in the range of 1%-3%
- Organic store growth in the range of 3%-4%
- "Gradual sales improvement" at retail stores in the United States
- Capital expenditures in the range of $85 million-$90 million
And the winner is...
After reviewing the companies' earnings results and outlooks on the rest of the year, the winner of this match-up is Ulta; its quarterly growth far outpaced that of Sally Beauty, its outlook calls for much higher growth in fiscal 2014, and its expansion goals set it up for continued success in the years ahead.
Also, on a side note, I believe Ulta is much more in touch with the trends and demands of the North American consumer, which makes it a much more desirable place to shop, and this is supported by its major outperformance in comparable-store sales growth.
On the day of the earnings release, Ulta's stock jumped 13.83% higher, but it has since fallen more than 2% and now sits over 25% below its 52-week high of $132.72 reached in November of last year. Foolish investors should take a deeper look and consider initiating positions right now and adding to them on any further weakness, because I believe the long-term potential of Ulta far outweighs any short-term fluctuations in the stock price.
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