Ulta Delivered Another Beautiful Quarter; Gap Put Up an Ugly One

Niche retailer Ulta Beauty (ULTA -2.73%) delivered a first-quarter profit beat and raised guidance last week, so don't ask Motley Fool Money host Chris Hill or Fool senior analysts Ron Gross and Jason Moser why investors didn't give its stock more applause.

In this segment of the podcast, they discuss what's going right at the company in terms of comps and revenue growth, its expansion plans, the strength of its loyalty program, and its surprising investments in artificial intelligence and augmented reality.

Then they pivot to a stock that's a falling knife: Gap (GPS -1.28%), which is trading near seven-year lows after a quarter of declining comp sales at all three of its chains -- yes, even Old Navy, which usually provides a bright spot for the long-suffering company. And as the Fools note, the CEO's excuses for Q1's poor performance only highlight some of the company's biggest strategic weaknesses.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

This video was recorded on May 31, 2019.

Chris Hill: Ulta Beauty shares falling a bit on Friday despite first quarter profits coming in higher than expected. Jason, they also raised guidance for the full fiscal year. Are we not impressed?

Jason Moser: I'm very impressed! I mean, I remain impressed with this business. It's been one of the great investing stories of the past several years. I think that really is primarily due to CEO Mary Dillon, what she has been able to do in executing her vision since 2013. Shares have better than tripled under her watch. I don't think there's any reason why we shouldn't expect that to continue. We look at the comps growth, top line growth, all very strong thanks to a healthy mix of traffic and increasing average tickets. The plan is to open around 80 new stores this year. They are steering away from quarterly guidance, which I'm refreshed to see. I think they're focused a little bit more, we're just going to tell you what our strategy is for the year, we're not going to sit there and worry about the quarter to quarter, understanding that retail is a bit more difficult to predict on that granular a level, so to speak. They've really done a good job executing, I think, on the loyalty customer. They have now 33 million loyalty members. 90% of their store count is essentially off-mall, so they don't have to worry about mall traffic. And Chris, what if I told you -- Ron, too -- what if I told you Ulta is a tech company? Would you believe me?

Ron Gross: No, Jason, I would not.

Hill: I mean, on the surface, they appear not to be.

Gross: This is a loaded question.

Moser: I won't say it's a tech company. But I will say they've made some impressive investments at least in AI and augmented reality, believe it or not. An acquisition at the end of last year, Glam, gives them the capability now within their app for customers to try on their products before ever even having to go to the store to potentially buy them. Ultimately, what I think that does, it translates to a better customer experience overall. They carry a lot of private label stuff, a lot of brand label stuff. It seems like they have products for just about everybody out there. Just a very, very impressive performing business.

Hill: First quarter results for Gap were a horror show. Same-store sales falling at both Gap and Banana Republic. And, Ron, Old Navy's comps were down as well. Old Navy is usually the silver lining of this business.

Gross: What if I told you Gap was a tech company?

Moser: [laughs] Tell me more!

Gross: No, you're right. This is a mess. Net sales down 2% overall. Old Navy, which is usually the bright spot, down 1%. It actually dampens the optimism for the spin-off that I still think will occur. Not a good result. Gap down 10% on comps, Banana Republic down 3%. Margins narrowed. Adjusted earnings down 43%. The stock is up 30% year to date. These folks are not getting it done.

Hill: The CEO talked about how this was one of the coldest, wettest quarters in memory.

Gross: [laughs] That's the exact quote!

Hill: I get that, but doesn't that also inadvertently highlight the fact that they have no e-commerce strategy to speak of? If you're completely dependent on getting people out of their homes, you're dead.

Gross: Yeah, for sure. It's an in-store experience. I've actually recently purchased something from The Gap, both in-store and online. It was the first time in a long time. The store is always 50% off. They've got Gap Dollars that they're constantly giving back for promotional reasons. It's a business that continues to struggle.

Hill: So, the stock at a seven-year low does not interest a value guy like you?

Gross: I'm going to say at 8.5X their current-year guidance when the median comps are 14X still is not of interest to me.