Is Ulta Beauty's Post-Earnings Drop a Buying Opportunity?

Is Ulta Beauty's Post-Earnings Drop a Buying Opportunity?

It seems that improvements in revenue, earnings, and comparable-store sales aren't enough to keep investors happy. This is what Ulta Salon, Cosmetics & Fragrance found out as its share price fell 20% after it announced its third-quarter results this month.

However, as the saying goes, "beauty lies in the eyes of the beholder." This downward movement could also be viewed as a "beautiful" opportunity for long-term investors. Let's see if Ulta is a good opportunity after its drop or if peers Sally Beauty Holdings and Avon Products are better picks.

A look at the results
Ulta's third-quarter results weren't that bad if one considers the general weakness in the retail space, but Mr. Market wasn't happy because the company failed to top expectations on both the top and bottom lines for the first time in six quarters . Total revenue came in at $618.8 million, which represented a 22.3% year-over-year jump and was within management's guided range of $613 million to $623 million.

The strong growth in revenue was on the back of a strong comps gain of 6.8% versus the same quarter last year. Comps growth was also within management's guided range of 5%-7%. The e-commerce channel was strong with 74% growth, contributing 170 basis points to comps. Strong growth in the e-commerce channel could be an important driver going forward, as this shows that Ulta is creating a loyal set of online customers thanks to its newly designed website.

Earnings per share, excluding severance charges and retention costs, surged 22% year-over-year to $0.72. This was within management's guided range of $0.71-$0.74 per share. However, analysts were expecting $0.74 per share.

Growth initiatives and more
During the quarter, the number of active members in the company's loyalty program increased 18% year-over-year to 12.5 million, partly driven by a loyalty sweepstakes program which added new customers. Hopefully this means Ulta can expect to have more customers coming into its stores at regular intervals.

The company added 55 new stores, up from 49 stores in the year-ago quarter. For the fourth quarter, Ulta expects a 22% year-over-year increase in square footage and it plans to open 125 new stores and seven remodeled stores. Going forward, Ulta expects to increase its square footage by 15% every year from fiscal 2014 onward.

The current trend in the retail segment is still choppy, and there's a competitive promotional environment for the holiday season. As a result, Ulta has been cautious with its fourth-quarter guidance, which turned out to be below the Street's estimates. For the fourth quarter, the company guided for net sales in the range of $853-$867 million and comps growth in the range of 7%-9%, which is quite impressive.

What about Sally Beauty and Avon?
Ulta has outperformed Sally Beauty in almost all departments. For example, consolidated net sales for the fourth quarter increased just 2.7% to $906.4 million for Sally, as comps grew just 40 basis points . Earnings per share came in at $0.38, which compares with $0.39 in the same quarter a year ago.

Going forward, Sally sees the potential to draw more customers in the U.S. as it has recently gained the distribution rights to several well-known professional brands. It has started placing advertisements in People StyleWatch magazine for these products.

In comparison, Avon's third quarter looked like a complete disaster compared with the results from Ulta and Sally Beauty. Avon markets its products globally through more than 6.2 million independent sales representatives, or reps. Total revenue for the quarter declined 7% year-over-year to $2.32 billion as a result of a 3% decline in active reps and a 7% decline in total units .

In all regions, barring Europe, the Middle East, and Africa, Avon's sales dipped on a currency-neutral basis across the board. Nothing seems to be working right as far as Avon is concerned. It is plagued with legal troubles, falling sales, unfavorable currency movements, and a shrinking number of active representatives.

Bottom line
Hence, Ulta is performing better than its peers in the beauty retail space. It is delivering superior revenue growth along with impressive comps growth. Ulta is expensive at a trailing P/E of 31, but this is slightly more than the industry average of 29. Considering the impressive growth that Ulta has shown so far, and given its aggressive plan of growing square footage, I believe that investors should look at the recent drop as a buying opportunity.

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Fool contributor Sharda Sharma has no position in any stocks mentioned. The Motley Fool recommends Ulta Salon, Cosmetics & Fragrance. The Motley Fool owns shares of Ulta Salon, Cosmetics & Fragrance. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Originally published