Cosmetics retailer Ulta Saloons (ULTA) reported better than anticipated fourth quarter results Thursday after the market close that were overshadowed by the company's light guidance. Revenue growth remained stellar, growing 30% year-over-year to $759 million, exceeding consensus estimates. Earnings were also stronger than the consensus anticipated, growing 30% year-over-year to $0.95 per share (excluding the impact of the extra week). Same-store sales jumped 8% during the fourth quarter; on top of a same-store sales gain of 11.5% in 2011, suggesting how strong the momentum in the underlying business is.
After its CEO mysteriously resigned to join Michael's Arts and Crafts in February, the stock has been under pressure, and investors have been looking for any signs of weakness to dump shares. The most recent catalyst was not the strong fourth quarter results, but rather the guidance. The firm anticipates revenue to grow in the low 20% range during the first quarter, with earnings growing 13%-17% to $0.60-$0.63 per share-well below the consensus estimate of $0.72 per share. The company also noted that same-store sales growth will be 4%-6% year-over-year, compared to 8.8% growth for 2012 and 10.9% in 2011. Earnings are also anticipated to grow at the low-end of the firm's long-term EPS growth target of 25%-30%, and capital expenditures will increase 19% year-over-year to $225 million.
In our view, free cash flow could be weak, even though the company believes it will be able to post positive free cash flow in 2013. We're also slightly concerned by the 20.5% increase in average inventory per store, suggesting the company could have a difficult time following through on its sales.
On the cost side, Ulta experienced 10 basis points of gross margin expansion, posting a gross margin of 34.2% during the quarter. For the full-year, gross margins jumped 60 basis points to 35.3%. We aren't anticipating much upside going forward, but we could see room for modest expansion.
SG&A declined 110 basis points for the full-year to 22% of sales as the company leveraged strong same-store sales growth. Although the company will significantly boost capital investment during 2013 in order to add new stores, improve its e-commerce experience, and better manage the supply-chain, we think the company could achieve some fixed cost leveraging if the company's guidance proves to be conservative.
Nevertheless, shares score a 1 on the Valuentum Buying Index (our stock-selection methodology), so we're staying away from the company in the portfolio of our Best Ideas Newsletter. We believe shares have room to fall, but the risk/reward on the short side looks less compelling at this time.