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Why Ulta Beauty Shares Were Crumbling Today

By Jeremy Bowman – Aug 30, 2019 at 12:25PM

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Shares of the cosmetics chain tumbled after it cut its full-year outlook.

What happened

Shares of Ulta Beauty (ULTA 1.73%), the high-flying salon-and-cosmetics chain were cracking today after the retailer lowered its guidance for the year and issued a disappointing second-quarter earnings report.

Ulta stock was down 29% as of 11:03 a.m. EDT.

A smiling woman wearing makeup

Image source: Ulta.

So what

On the surface, Ulta turned in another solid quarter. Comparable sales rose 6.2%, revenue was up 12% to $1.67 billion, and earnings per share increased 12.2% to $2.76. 

However, with Ulta's reputation as a growth stock, investors were expecting more. Analysts had targeted $1.75 billion in revenue and $2.80 in EPS. 

The performance in the quarter overall didn't seem to shake investors as the company added another 20 stores and expanded its gross margins. However, guidance was a big turnoff.

CEO Mary Dillon explained: "Looking forward, we have updated our fiscal 2019 outlook to reflect the headwinds we are currently seeing in the US cosmetics market. We remain confident that our guest-centric, differentiated business model will drive continued market share gains and strong returns for our shareholders over the long term."

Now what

Ulta dialed back revenue guidance for the year from low double digits to a range of 9% to 12% and said it now expected comparable sales growth between 4% and 6%, compared to a prior range of 6% to 7%. It also slashed its full-year EPS forecast range by nearly a dollar, from $12.83-$13.03 to $11.86-$12.06.

CFO Scott Settersten explained on the earnings call that the company had anticipated an improving trend in prestige makeup and strong growth in the overall makeup market; however, that hasn't materialized.

The guidance is a sharp contrast with the recent report from Estee Lauder (EL -0.10%), which surged on strong results; the global cosmetics giant was also boosted by strong growth in China.

It's understandable why the market is disappointed. Earnings per share are expected to grow only 9% this year. However, Ulta's model remains strong, and the company should capture an increasing share of the cosmetics market, especially as it benefits from changes in the retail industry. At a P/E ratio of just 20, the stock looks like a buy after today's sell-off.

Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool recommends Ulta Beauty. The Motley Fool has a disclosure policy.

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