Why Did Ulta Beauty Stock Fall after Its Q2 Results?

• Ulta Beauty stock fell 22% after its second-quarter earnings miss.
• Management lowered its guidance due to industry-wide challenges.

Ulta Beauty (ULTA) stock fell about 22% after its lower-than-expected second-quarter results on Thursday. The company’s management lowered its fiscal 2019 sales and earnings guidance due to challenges in the US cosmetic market.

The cosmetics market witnessed stellar growth over the past several years. So far in 2019, the category growth has declined. Ulta Beauty’s management expects industry-wide challenges in the cosmetic market to hurt its sales in the near term.

On the second-quarter conference call, Mary Dillon, the company’s CEO and director, stated that growth in the makeup category is growing at a softer rate. She said that the trends deteriorated at the end of the second quarter.

L’Oréal’s half-yearly report highlighted that the growth in North America is taking a hit from the slowdown in the makeup category. The company’s comps remained flat in North America. A decline in makeup offset growth in skincare and fragrances.

Meanwhile, Estée Lauder (EL) is also facing a tough retail environment in North America. However, the company expects to stabilize its business in North America despite a challenging retail environment. Estée Lauder expects it’s fiscal 2020 net sales to increase 7%–8%.

Notably, the growth has shifted from makeup to the skincare category. Ulta Beauty emphasized skincare products to offset the weakness in the makeup category. However, skincare accounts for a smaller portion of the company’s business.

Ulta Beauty posted net sales of $1.67 billion, which increased 12.0% YoY. The net sales fell short of analysts’ estimate of $1.68 billion. Softness in the makeup category remained a drag. The company’s comps increased 6.2% due to higher traffic (+5.4%) and a rise in the ticket size (+0.8%). Notably, the company has missed analysts’ sales expectation for two consecutive quarters.

The gross margin improved by 40 basis points to 36.4%. However, the operating margin contracted by 50 basis points to 12.5%, which reflected a higher SG&A expense rate. Higher labor costs and investments in growth initiatives drove the SG&A expense rate 90 basis points higher.

Ulta Beauty posted an adjusted EPS of $2.76, which increased 12.2% due to the lower effective tax rate and share buybacks. However, the second-quarter EPS fell short of analysts’ expectations of $2.80.

Anticipating softness in the makeup category in the US, Ulta Beauty lowered its sales and earnings outlook. However, the guidance cut probably won’t sit well with investors. The guidance cut could weigh on Ulta Beauty stock.

The company expects its sales to increase 9%–12% in fiscal 2019, which is lower than its guidance of low double-digit growth. Meanwhile, the EPS will likely be $11.86–$12.06 in fiscal 2019. Earlier, Ulta Beauty’s management expected the EPS to be $12.83–$13.03.