Ulta Salon, Cosmetics & Fragrance: Uncertainty And Growth Slowdown Continue To Weigh On Shares

| About: Ulta Salon, (ULTA)

Shares of Ulta Salon, Cosmetics & Fragrance (NASDAQ:ULTA) has had a tough week. Shares of the beauty salon retailer have lost some 18% over the past five trading days. Shares fell some 16% in Friday's trading session after the company reported a disappointing set of fourth-quarter results on Thursday after the close.

Fourth-Quarter Results

Ulta Beauty generated revenues of $758.8 million for the fourth quarter of 2012, up 30.3% compared to the year before. The company benefited from the fact that the final quarter of the year contained an extra working week. Sales were also driven by an impressive 8.0% increase in same-store sales. Quarterly revenues beat consensus estimates of $753 million.

The company managed to boost gross margins by a modest 10 basis points towards 34.2%. Operating sales leverage resulted in a steep decline in selling, general and administrative expenses, which fell 100 basis points towards 20.3% of total revenues.

Consequently, operating income rose 41.7% to $103.8 million. Net income rose a similar percentage towards $64.5 million, while earnings per share rose 37% to $1.00 per share. Fourth-quarter earnings were boosted by $0.05 per share as a result of the 14th working week. Earnings beat consensus estimates of $0.98 per share.

Interim-CEO Dennis Eck commented on the results, "The Ulta team achieved strong fourth quarter results to complete an exceptional year in 2012. Excellent execution of our multi-year growth strategy was evident in the milestones achieved during the year: we increased square footage by 23% with the addition of 101 net new stores, we greatly enhanced our offering with newness across the board, we implemented a new Customer Relationship Management platform, broadened our market reach and brand awareness, and improved our digital capabilities including rapid growth in our e-commerce business."


For the current first quarter of its fiscal 2013, Ulta Beauty expects to generate revenues between $568 and $577 million. At the midpoint of the guidance, revenues are expected to increase 21% compared with last year's revenues of $474.1 million. The revenue guidance fell slightly short of consensus estimates of $579 million.

Comparable same-store sales growth rates are expected to come in between 4 and 6%, compared with a growth rate of 10.1% in the first quarter of past year. Comparable sales will be boosted by approximately 100 basis points as e-commerce sales will now be added into the calculation as well.

Diluted earnings per share are expected to come in between $0.60 and $0.63 per share. As such earnings per share are expected to increase some 14% on the year before at the midpoint of the earnings guidance. The earnings guidance severely missed analysts estimates of $0.72 per share.

For the full year of fiscal 2013, Ulta Beauty expects to report comparable sales growth of 4 to 6% as well. Earnings per share growth is expected to come in at the low end of the 25-30% earnings growth target. A 25% earnings growth target implies full-year earnings per share of roughly $3.35 for the coming year, coming in just short of estimates around $3.39 per share.


Ulta Beauty ended its fiscal year of 2012 with $320.5 million in cash and equivalents. The company operates without any debt outstanding, for a favorable net cash position.

The company generated full-year revenues of $2.22 billion, up 25% on the year before. Net profits rose 43% to $172.5 million, or $2.68 per share.

The market currently values Ulta Beauty around $4.7 billion, which values operating assets at $4.4 billion. This values the operating assets of the firm around 2.0 times annual revenues and 25-26 times annual earnings.

The company paid a special dividend of $1.00 per share for the year of 2012. Ulta Beauty does not pay regular dividends at the moment.

Some Historical Perspective

Shareholders of Ulta Beauty have seen decent returns in recent years. Shares fell from $30 in 2007 to lows of $5 in 2009. From that point in time shares have twenty-fold towards $100 in 2012. So far in 2013, shares of Ulta Beauty have already lost 25% after former CEO Chuck Rubin has stepped down and shares have seen a correction on the back of a disappointing guidance.

Between 2008 and 2012, Ulta Beauty has more than doubled its annual revenues from $1.08 billion to $2.22 billion. Net income increased almost seven-fold over the same period from $25.3 million towards $172.5 million. Earnings per share rose slightly less quickly as the shareholder base diluted by some 10%.

Investment Thesis

Ulta Beauty has been growing at an impressive pace. In 2012, the company opened 101 new stores, increasing its store base by 22.5%. The company expects to open another 125 stores this year, increasing its store base by a similar percentage.

The company, which went public in 2007 at $18 per share has seen its shares quadruple ever since, despite the recent sell-off. Investors have grown worried that the successful CEO Chuck Rubin has stepped down in February to become CEO at Michaels Stores. The specialty retailer of arts and crafts is expected to go public later this year.

Investors are worried about the sudden departure of Rubin given the recent success. Add to that the 48% increase in inventories, which far outpaced revenue growth, and the soft guidance for the first quarter of 2013 and the remainder of the year, and investors have every reason to be worried. The increased investments in the upgrade of warehouse systems, the re-design of e-commerce systems and additional openings of Clinique boutique stores will require additional capital expenditures as well. All these investments are expected to impact the bottom line by some $0.13 per share in 2013.

The company did point out that there are no structural issues with its growth strategy. The company will steadily look for a suited new chief executive and blames the soft first-quarter guidance to higher investment costs and a temporarily slowdown. Based on 2013's full-year guidance, the operating shares are valued at a premium valuation of 22-23 times annual earnings. The company furthermore announced a $150 million new share repurchase program, sufficient to retire little over 3% of its shares outstanding.

Despite the recent sell-off I do not think shares are offering compelling value at these levels, given the slowdown in comparable sales growth and stagnating operating margins. The uncertainty about the search for a new CEO could continue to put pressure on shares amidst a slowdown in operating performance.

I remain on the sidelines.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.