Ulta Beauty Reveals Big Results in the First Quarter

Shareholders of ULTA Salon (ULTA -2.08%), the largest beauty product retailer in the United States, could not be more excited following its first-quarter earnings release on Tuesday, June 10, as investors bid the stock up nearly 14% the next day. Based on this quarter's financial results, cosmetics, fragrances, and skin and hair care products saw high demand from consumers. However, competitor Regis (RGS 1.83%) did not experience this high demand, and it reported less favorable earnings. Let's take a closer look at just how well Ulta performed in its first quarter of the new fiscal year.

Going the distance
Diamonds may be a girl's best friend a majority of the time, but for the three months ended May 3, 2014, it seems that beauty products were a girl's favorite. For Ulta's retail and e-commerce business, the fiscal year is off to a fantastic start with net sales jumping 22.5% to $713.8 million from $582.7 million in the first quarter of fiscal 2013. In addition, comparable-store sales, which includes all Ulta stores open for at least 14 months along with e-commerce sales, increased 8.7% with e-commerce sales increasing a whopping 72.3% over last year's first quarter.

Ulta's Chief Executive Officer, Mary Dillon, commented on the company's successes in the first quarter with this statement:

The team's accomplishments included improving retail transactions which turned positive, driving continued momentum in our online business, successfully rolling out new brands, completing a smooth conversion of our loyalty program members onto one platform, and managing inventory very well. 

By taking these steps, Ulta was able to increase its net profit by 19.4% to $50.0 million compared to the first quarter of fiscal 2013 when Ulta achieved a profit of $41.8 million. In addition, earnings per diluted share increased 19.5% to $0.77. Furthermore, while Ulta was not able to reduce its selling, general, and administrative, or SG&A, expenses, it did manage to maintain its costs. For instance, SG&A expenses in the first quarter of fiscal 2013 represented 22.8% of net sales, which was also the case in the first quarter of fiscal 2014. If this wasn't enough, Ulta opened 21 stores in the first quarter, which brought its total store count to 696 stores, and it increased its total square footage by 20% from the same period a year ago.

Ulta expects the second quarter to be another winner
Looking ahead to the second quarter, Ulta executives expect their company's brand to remain strong. For starters, Ulta expects net sales in the second quarter of fiscal 2014 to increase by at least 17.5% to $706 million, and at best, increase to $717 million compared to the second quarter in fiscal 2013 when net sales totaled $601 million. On the other hand, Ulta expects comparable-store sales to slip somewhat, but still increase between 5%-7% despite increasing 8.4% in the second quarter of fiscal 2013. Ulta expects that earnings per diluted share will fall between $0.78-$0.83 in the second quarter compared to last year's second quarter when earnings per share totaled $0.70.

For the full year, Ulta has stated that it expects its success to continue as it plans to open 100 net new stores by the fiscal year's end; it will thereby increase its total square footage by 15%. In addition, Ulta hopes to increase both net sales and net profit "in the mid-teens percentile range". Last but not least, Ulta plans to renovate 12 of its current 696 locations to drive foot traffic and sales even higher. With these goals in mind, is it possible for Ulta to deliver despite competition from Regis Corporation?

Consumers are choosing Ulta hair salons over Regis salons
Ulta Beauty is doing exceptionally well in its industry, especially in the face of Regis Corporation, which primarily operates its 7,000 hair salons and sells hair care products to customers. Despite its recent efforts to improve its POS technologies, restructure its organization, and increase merchandise sales in order to turn around its business, Regis is still struggling to get back on its feet. Unlike Ulta, Regis performed quite poorly in its most recent quarter ended March 29, 2014. Not only did revenue drop in both its service and product divisions, but same-store sales fell as well from the first quarter in fiscal 2013.

Regis Trailing Three Months

ULTA Salons, Cosmetics, & Fragrance Trailing Three Months

Based on the figures in the charts above, it is quite obvious that Ulta had a much stronger performance following the holiday season with net sales up 22.5% whereas revenue at Regis declined 6.6%. Furthermore, same-store sales at Regis fell even further from the same period a year earlier, declining 5.7%. At Ulta comparable-store sales increased 8.7%. While Regis's turnaround strategy may pay off for the company in the long run, its business at this time is inferior to that of Ulta, which effectively manages a hair salon in each of its stores while selling a multitude of beauty products for both men and women.

Foolish takeaway
Foolish investors should consider making Ulta part of their portfolios after this latest earnings release as Ulta is likely to perform increasingly well in both the short term and long term. Not only do customers love the products that Ulta carries in each of its stores and online, they enjoy the benefits that come with being a member of Ulta's rewards program. In the meantime, investors would be wise to keep an eye on Ulta and whether it meets or exceeds its second-quarter expectations. On the other hand, investors should hold off on buying into Regis Corporation until it showcases positive growth in both sales and profit. For now, Ulta's year is off to a great start.