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Ulta Beauty: Key Takeaways from Its Mixed Q4 Results

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Ulta Beauty (NASDAQ:ULTA) stock fell 10.3% on Thursday as the US stock market crashed due to rising concerns related to the coronavirus. Ulta Beauty CEO Mary Dillon issued a statement yesterday. She revealed the steps that the company has taken due to the outbreak. She said that Ulta Beauty has taken the required precautions. The company is temporarily suspending its skin, makeup, brow, lash and waxing services. Investors are concerned about whether the coronavirus might have a significant impact on the company’s business.

Ulta Beauty stock fell 1.8% in the after-hours trading on Thursday in reaction to the company’s mixed results for the fourth quarter of fiscal 2019. The company’s earnings beat Wall Street’s expectations, while the net sales lagged the predictions.

As of Thursday, Ulta Beauty stock has fallen 21.6% year-to-date. However, the stock has risen 6.9% as of 10:16 AM ET today.

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Ulta Beauty’s Q4 earnings

Ulta Beauty’s sales rose 8.5% YoY (year-over-year) to $2.31 billion. Analysts expected sales of $2.32 billion for the holiday sales quarter. The comparable sales growth of 4% in the fourth quarter of fiscal 2019 reflected a slowdown compared to 9.4% in the fourth quarter of fiscal 2018. However, the comparable sales exceeded analysts’ forecast of 3.38%.

The slowdown in the US make-up category, in prestige and mass channels, continued to have a negative impact on the company’s sales. The skincare category delivered strong results in the quarter. Also, the company’s e-commerce sales grew by double digits. The demand for celebrity beauty brands like Kylie Jenner’s “Kylie Cosmetics” helped the company offset the weakness in certain established prestige brands to some extent.

Ulta Beauty’s fourth-quarter EPS grew 7.8% YoY to $3.89 and beat analysts’ forecast of $3.73. The company’s EPS gained from higher sales and a $0.06 benefit from higher federal income tax credits. However, a lower operating margin had a negative impact on the bottom line.

The fourth-quarter gross margin expanded by 10 basis points YoY to 35.0% due to higher merchandise margins. However, the company’s operating margin fell by about 70 basis points YoY to 12.5%. Growth investments, higher marketing expenses, and increased payroll expenses impacted the operating margin.

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Weak outlook

Ulta Beauty expects its total sales growth to be 7.0%–8.0%. The company expects its comparable sales growth to be 3%–4% in fiscal 2020. The estimated growth rates don’t take the coronavirus into account. Notably, the estimates are still lower than the fiscal 2019 growth rates. In fiscal 2019, the company’s net sales grew 10.1% to $7.40 billion, while comparable sales grew 5%.

The company expects its fiscal 2020 EPS to be $12.55–$12.75 compared to $12.15 in fiscal 2019. Analysts expected an EPS of $13.06 for fiscal 2020. Ulta Beauty expects challenges in the makeup category to be a drag on its business. The coronavirus will likely have a negative impact on the beauty industry and retail sector.

Analysts cut their target price for Ulta Beauty stock

Several analysts lowered their target price for Ulta Beauty stock following the mixed results and weak outlook.

  • Piper Sandler lowered its target price to $215 from $235.
  • Oppenheimer lowered its target price to $275 from $310.
  • J.P. Morgan lowered its target price to $290 from $326.
  • Cowen and Company lowered its target price to $265 from $300.
  • Evercore ISI lowered its target price to $270 from $375.
  • Jefferies lowered its target price to $250 from $310.
  • Guggenheim lowered its target price to $300 from $330.
  • Citigroup lowered its target price to $205 from $242.
  • Deutsche Bank lowered its target price to $242 from $287.
  • Telsey Advisory Group lowered its target price to $280 from $330.
  • Stifel lowered its target price to $220 from $230.

Currently, 16 out of the 29 analysts rate Ulta Beauty stock as a “buy,” while the remaining 13 recommend a “hold.” Ulta Beauty plans to open about 75 net new stores, remodel or relocate 15 locations, and refresh 42 stores in fiscal 2020. The company opened 86 new stores, remodeled 12 locations, relocated eight stores, and refreshed 240 locations in fiscal 2019. Meanwhile, the company operated 1,254 stores at the end of fiscal 2019.

Ulta Beauty also continued to enhance its product offerings in fiscal 2019. The company expanded the distribution of its key prestige brands—Clinique, MAC, Lancôme, and Estée Lauder—to more stores. The company also added 47 new skincare brands like Sunday Riley, The Ordinary, Urban Skin RX. Skincare was the fastest-growing category in fiscal 2020 and delivered double-digit comparable sales growth.

Ulta Beauty’s performance in the first half of fiscal 2020 will largely be determined by the impact of the coronavirus. Currently, the company can’t quantify the impact of any potential supply-chain disruptions or decline in consumer demand from the coronavirus.

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