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Fragrance and beauty retailer Ulta Salon, Cosmetics, and Fragrances (NASDAQ:ULTA) reported strong results Tuesday for the first quarter of 2012. We are putting the firm under review while we re-evaluate our long-term expectations. We expect to increase our fair value estimate.

Sales increased nearly 23% compared to a year ago, in-line with the consensus estimate, driven by impressive same-store-sales growth of 10%. Earnings per share grew slightly more than consensus, advancing by 46% to $0.54. Gross margins also increased 110 basis points to 36% compared to 34.9% in the same quarter last year. Average inventories per store grew by 9.6% versus a year ago, so we aren't worried about the company stockpiling too much product.

Much like Dick's Sporting Goods (NYSE:DKS), Ulta seems insulated from competition from Amazon.com (NASDAQ:AMZN), though its prices tend to be slightly higher. With traditional big box retailers like Best Buy (NYSE:BBY) and Kohl's (NYSE:KSS) losing business consistently, Ulta is breaking the trend right now in retail. We assumed that since many consumers tend to buy the same beauty products (almost religiously) that consumers would flock to online retail as a cheaper and more convenient avenue. That may not be the case in every instance.

Management also raised its target of stores to 1,200 from its previously announced target of 1,000 stores. We suspect conditions look even more attractive than management had previously thought, as the firm also gave a same-store-sales forecast of 7-8% for fiscal year 2012, which is in excess of its long-term goal. We continue to evaluate whether this increased forecast is realistic, or if such store growth risks cannibalizing sales of existing stores.

Regardless, Ulta's store opening execution has been top notch. The company plans to open 100 new stores in fiscal year 2012 without the use of debt or any real financial leverage. The firm has over $250 million in cash on the balance sheet and has already generated $12 million in operating cash flow through the first quarter of 2012. Accelerating store openings runs the risk of poor execution, but management has demonstrated its ability to handle opening stores thus far. Ulta also declared a special $1 per share dividend in the first quarter because the firm simply had too much cash on hand. We think this capital allocation decision makes sense as we expect the share price to still be higher than our upwardly-revised fair value estimate, which we plan to publish soon.

Source: Ulta's Strong First Quarter Shows Tremendous Execution