Ulta Beauty Shareholders Should Take Heart

Ulta Salon, Cosmetics & Fragrance (ULTA -0.27%) is the largest beauty-product retailer in the United States, offering a variety of brand-name cosmetics, men's and women's fragrances, skincare products, and hair care products. In addition, Ulta Beauty operates a full-service salon in each of its superstores. The beauty retailer has been busy adding Clinique and Lancome boutiques to its stores, as well as launching new and exclusive products for its brand collection.

Unfortunately, despite its marketing and store expansion efforts and its other successes, Ulta Beauty fell short in its third-quarter report for fiscal 2013, which bumped down the share price by as much as 20%. Despite this poor result and the pullback in the company's stock, shareholders should take heart as the company's future remains bright. 

Standing its ground
For the recently reported quarter, Ulta was expected to earn $0.74 a share on revenue of $622 million, but instead it came $0.02 shy of the mark at $0.72 a share with revenue of $618.8 million. However, revenue did increase by 22.4% over the $505.64 million it reported for the same period last year. In addition, Ulta Beauty's net income increased to $45.4 million, a 19.1% increase from the $32.15 million it earned in the third quarter of fiscal 2012.

Although Ulta reported a greater increase in same-store sales of 8.9% in the third quarter of fiscal 2012, the company's same-store sales were still strong in the recent quarter with an increase of 6.8%. Operating income and gross profit also increased in the third quarter of fiscal 2013. All of this means that despite competition from LVMH Moet Hennessy Louis Vuitton SA (LVMUY 0.33%)-owned Sephora and Macy's (M 3.10%), the company continues to perform well.

Going the distance
Ulta's main focus right now is expanding the chain and its product lines. In fact, the third quarter ending Nov. 2, 2013 made history for Ulta as it added 55 new stores -- the most store openings ever for a single quarter. Now, Ulta operates 664 stores across the United States. In addition, the company added 10 more Clinique boutiques to its stores and 20 Lancome boutiques, bringing the total to 100 stores with Clinique products and 105 stores selling Lancome products.

Furthermore, Ulta revamped its website -- Ulta.com-- with the latest innovative technologies to make shopping easier for customers; thus, e-commerce sales rose by a whopping 74.4%. The number of Ulta reward members has also increased by 18% since the third quarter of fiscal 2012 to 12.5 million, and this total is expected to rise with the holiday shopping season already under way. Ulta has big plans in the works for its short and long-term growth, and it should not be underestimated by investors.

Looking ahead to fourth-quarter results
Ulta has high expectations for itself going into the fourth quarter. You would think the beauty retailer would downplay its expected earnings rather than set high goals since the holiday shopping season is six days shorter than last year, but this is not the case. Ulta expects fourth quarter revenue between $853 million and $867 million even though revenue was much lower in the fourth quarter of fiscal 2012 at $758.8 million.

Furthermore, Ulta expects same-store sales growth to be between 7% and 9% based on last year's fourth quarter comparable-store sales of 8.6%. However, Ulta's same-store sales could increase even more this year depending on how many sales are conducted through its e-commerce site thanks to its latest improvements and design features.

Competing for beauty
Ulta Beauty competes directly with Regis Salons, Macy's, and Sephora, which also offer similar products such as haircare, cosmetics, and fragrances. Regis Salons are owned by Regis Corporation (RGS 4.24%), which operates over 12,600 full-service salons that sell men's and women's haircare products. Regis Corporation had a rough first quarter ending in Sept. 30, 2013 as EPS dropped to $0.01, which was an 87.5% drop from the same period a year prior.

Macy's did quite well for its third-quarter earnings release, beating the EPS estimates by $0.09 with $0.47 per share as total revenue increased by 3%. Ulta, though, had the more impressive revenue jump of 22.4%. On a side note, Macy's division that includes shoes, cosmetics, and fragrance collections actually makes up 28% of the company's sales -- it is the largest of its divisions.

Sephora is owned by LVMH Moet Hennessy Louis Vuitton SA, and it also sells products such as cosmetics, skin care essentials, and fragrances. Although Sephora's parent company is mainly traded in Europe, its products and brands can still be purchased in over the counter markets within the United States. Sephora is doing quite well especially in regard to expanding its global operations, with over 280 individual stores and over 300 Sephora boutiques within J.C. Penney department stores in North America alone, and over 600 stores throughout Europe and parts of Asia. 

Foolish takeaway
Despite what Wall Street perceives to have been a disappointing quarter, Ulta shareholders have reason to believe that the company has many years of growth ahead. One quarter does not define a company's future success. Ulta will outshine the competition through its blowout of store openings, redesigned website, and ongoing cosmetic brand add-ons to its stores with Clinique and Lancome boutiques. The stock is certainly worth a glance from investors looking for a fast growing company that, despite a disappointing quarter in the eyes of Wall Street, still continues to grow very quickly.