Ulta Salon: Weak guidance might be an opportunity

|About: Ulta Salon, Cosmetics &... (ULTA)|By:, SA News Editor

Analysts pull back on Ulta Salon (ULTA) following yesterday's weak Q3 and uninspiring guidance, but differ on ULTA's long-term prospects:

Piper: "We are downgrading shares of ULTA to Neutral from Overweight based on the following considerations: 1) management indicated that they are suspending their prior target of mid-teens% operating margins; 2) management lowered their square footage growth assumptions to 15% versus their prior range of 15%-20% growth; 3) management has adapted a more muted outlook for EPS growth next year and now expects to see low-20s% growth compared to 25% previously."

Goldman: "ULTA’s 3Q results revealed two layers of unanticipated challenges. (1) An incrementally-promotional environment challenged 3Q results, and has continued into 4Q. (2) New CEO Mary Dillon is assessing the company’s investment priorities, which involve incremental commitments to supply chain and marketing. These factors led the firm to fall slightly short of 3Q consensus (though within guidance); lower 4Q guidance; direct 2014 initial EPS toward low-20% growth, below the prior long-run guidance of 25-30%; and, “suspend” long-term mid-teens EBIT margin guidance... We still see a strong growth concept, with strong ROI, albeit with murkier near-term visibility. The company appears to be assessing the magnitude of the investment necessary to optimize digital marketing, labor, and supply chain; resolving these questions in coming months should enhance clarity on profit potential."

Wells Fargo: "We believe the pullback in ULTA’s shares (down 17% after-market) due to disappointing guidance is a buying opportunity for this high-quality growth story. We believe the recent traffic slowdown will prove to be temporary, related to a share shift to cold-weather apparel categories in October and November (which saw pent-up demand after two warm winters) and to gifting/promotional holiday categories during holiday. ULTA’s inventories are well managed and have minimal markdown risk."