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Category: Stock Market and Ulta Beauty Inc
Date: 30 August 2019 Stock Price: $337.50 Stock Price after hours trade : $264 (down -21.8%) We take a look at the 2nd quarter of their 2019 fiscal year earnings report of Ulta Beauty, the largest U.S. beauty retailer. With the stock plunging more than 20% in after hours trade the question is what has markets spooked?
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About Ulta Beauty Inc
At Ulta Beauty (NASDAQ: ULTA), the possibilities are beautiful. Ulta Beauty is the largest U.S. beauty retailer and the premier beauty destination for cosmetics, fragrance, skin care products, hair care products and salon services. In 1990, the Company reinvented the beauty retail experience by offering a new way to shop for beauty – bringing together all things beauty, all in one place. Today, Ulta Beauty has grown to become the top national retailer offering the complete beauty experience.
Ulta Beauty brings possibilities to life through the power of beauty each and every day in our stores and online with more than 25,000 products from approximately 500 well-established and emerging beauty brands across all categories and price points, including Ulta Beauty’s own private label. Ulta Beauty also offers a full-service salon in every store featuring hair, skin, brow, and make-up services.
Ulta Beauty is recognized for its commitment to personalized service, fun and inviting stores and our industry-leading Ultamate Rewards loyalty program. As of August 3, 2019, Ulta Beauty operates 1,213 retail stores across 50 states and also distributes its products through its website, which includes a collection of tips, tutorials and social content. For more information, visit www.ulta.com.
Ulta Beauty brings possibilities to life through the power of beauty each and every day in our stores and online with more than 25,000 products from approximately 500 well-established and emerging beauty brands across all categories and price points, including Ulta Beauty’s own private label. Ulta Beauty also offers a full-service salon in every store featuring hair, skin, brow, and make-up services.
Ulta Beauty is recognized for its commitment to personalized service, fun and inviting stores and our industry-leading Ultamate Rewards loyalty program. As of August 3, 2019, Ulta Beauty operates 1,213 retail stores across 50 states and also distributes its products through its website, which includes a collection of tips, tutorials and social content. For more information, visit www.ulta.com.
Financial overview of Ulta's latest earnings report
Numbers we are interested in: (for the quarter):
- Net sales: $1.67 billion (up 12% from $1.488.2 million in the same quarter of the previous year)
- Cost of sales: $1.061 billion (up from $952.760 million in the same quarter of the previous year)
- Net income: $161.258 million (up from $148.323 million in the same quarter of the previous year)
- Net income per share: $2.76 (up from $2.46 in the same quarter of the previous year)
- Diluted number of shares outstanding: 58.446 million (down from 60.375 million due to their share repurchase program)
- Cash and cash equivalents: $177.398 million (down from $237.107 million)
- Cash and cash equivalents per share: $3.03
- Cash and cash equivalents makes up 3.76% of the group's total assets
- Receivables: $107.263 million (up from $103.67 million for the same quarter of the previous year)
- Receivables makes up 2.3% of the group's total assets (we see anything more than 20% as a worry)
- Merchandise inventories: $1.3159 billion (up from $1.219 billion for the same quarter of the previous year)
- Merchandise inventories makes up 27.9% of the group's total assets (and we see anything more than 20% as a concern. So we are a little worried about their high inventory levels. These levels are fine as long as they can move stock quickly. If they cant they will have to mark down price to move stock faster which will affect their margins
- Stockholders equity: $1.839 billion (up from $1.812 billion for the same quarter of last year)
- Stockholders equity per share: $31
- Cash generated from operations for the quarter (estimated) :$176.7 million
- Cash generated from operations per share: $3.02 (this is calculated as we use it in our valuation models)
Ulta beauty's management commentary on the results and earnings guidance
BOLINGBROOK, Ill.--(BUSINESS WIRE)-- Ulta Beauty, Inc. (NASDAQ: ULTA) today announced financial results for the thirteen week period (“Second Quarter”) and twenty-six week period (“First Six Months”) ended August 3, 2019 compared to the same periods ended August 4, 2018.
“The Ulta Beauty team delivered another quarter of solid top-line performance, gross margin expansion, and double-digit earnings growth,” said Mary Dillon, Chief Executive Officer. “Looking forward, we have updated our fiscal 2019 outlook to reflect the headwinds we are currently seeing in the US cosmetics market. We remain confident that our guest-centric, differentiated business model will drive continued market share gains and strong returns for our shareholders over the long term.”
For the Second Quarter of Fiscal 2019
Outlook
The Company has updated its fiscal 2019 outlook to reflect anticipated industry-wide sales headwinds in cosmetics and currently expects to:
“The Ulta Beauty team delivered another quarter of solid top-line performance, gross margin expansion, and double-digit earnings growth,” said Mary Dillon, Chief Executive Officer. “Looking forward, we have updated our fiscal 2019 outlook to reflect the headwinds we are currently seeing in the US cosmetics market. We remain confident that our guest-centric, differentiated business model will drive continued market share gains and strong returns for our shareholders over the long term.”
For the Second Quarter of Fiscal 2019
- Net sales increased 12.0% to $1,666.6 million compared to $1,488.2 million in the second quarter of fiscal 2018;
- Comparable sales (sales for stores open at least 14 months and e-commerce sales) increased 6.2% compared to an increase of 6.5% in the second quarter of fiscal 2018. The 6.2% comparable sales increase was driven by 5.4% transaction growth and 0.8% growth in average ticket;
- Gross profit as a percentage of net sales increased 40 basis points to 36.4% compared to 36.0% in the second quarter of fiscal 2018, primarily due to improvement in merchandise margins driven by our marketing and merchandising strategies and leverage of fixed store costs, partially offset by investments in our salon services;
- Selling, general and administrative (SG&A) expenses as a percentage of net sales increased 90 basis points to 23.6% compared to 22.7% in the second quarter of fiscal 2018, primarily due to deleverage of corporate overhead related to investments in growth initiatives and store labor;
- Pre-opening expenses increased to $5.0 million compared to $4.5 million in the second quarter of fiscal 2018. Real estate activity in the second quarter of fiscal 2019 included 20 new stores, eight remodels, and four relocations, compared to 19 new stores, seven remodels, and one relocation in the second quarter of fiscal 2018;
- Operating income increased 7.3% to $208.0 million, or 12.5% of net sales, compared to $193.8 million, or 13.0% of net sales, in the second quarter of fiscal 2018;
- Tax rate decreased to 23.1% compared to 23.9% in the second quarter of fiscal 2018. The lower effective tax rate is primarily due to an increase in federal income tax credits;
- Net income increased 8.7% to $161.3 million compared to $148.3 million in the second quarter of fiscal 2018; and
- Diluted earnings per share increased 12.2% to $2.76, which included a $0.04 benefit primarily due to an increase in federal income tax credits, compared to $2.46 in the second quarter of fiscal 2018, which included a $0.02 benefit due to income tax accounting for share-based compensation.
Outlook
The Company has updated its fiscal 2019 outlook to reflect anticipated industry-wide sales headwinds in cosmetics and currently expects to:
- open approximately 80 new stores, execute approximately 20 remodel or relocation projects and complete approximately 270 store refreshes;
- increase total sales between 9% and 12% (previously low double-digit growth);
- achieve comparable sales growth of approximately 4% to 6% (previously 6% to 7%), including e-commerce growth of 20% to 30%;
- deleverage operating profit margin rate in the range of 60 to 70 basis points (previously leverage in the range of 10 to 20 basis points);
- deliver diluted earnings per share in the range of $11.86 to $12.06 (previously $12.83 to $13.03), including the impact of approximately $700 million in share repurchases and assuming a 23% effective tax rate (previously 24%);
- incur capital expenditures of $340 million to $350 million (previously $380 million to $400 million); and
- incur depreciation and amortization expense of approximately $300 million (previously $315 million).
So the concern we have is the fact that the earnings guidance has been lowered for the diluted earnings per share (by around $1 a share), and the group states the revised earnings per share guidance includes the impact of approximately $700 million share buy back program. So earnings per share are lowered substantially yet with $700million share repurchase program close to 2 million shares will be taken out of this equation (based on them repurchasing $700 million worth of shares at the current price of $337.45 a share). And 2 million shares is about 3.45% of their current outstanding shares. So the earnings per share guidance was lowered by about 8.4% (plus then we add the 3.45% of shares in issue that will be taken out of the equation). So the net effect of their updated earnings guidance is actually 11.9%.
So in total their guidance on their expected earnings per share has declined by almost 12% compared to the previous guidance provided. And we suspect this is what has the markets spooked regarding Ulta beauty and this is the reason for the stock's massive plunge during after market trade in which Ulta beauty lost over 20% of its value (see the Utla stock price charts below for more)
So in total their guidance on their expected earnings per share has declined by almost 12% compared to the previous guidance provided. And we suspect this is what has the markets spooked regarding Ulta beauty and this is the reason for the stock's massive plunge during after market trade in which Ulta beauty lost over 20% of its value (see the Utla stock price charts below for more)
Ulta Beauty Inc (NASDAQ: ULTA) stock price history
The image below, obtained from Google, shows the stock price history of Ulta Beauty Inc over the last 5 years. Ulta Beauty's stock price has seen extraordinary growth over the last 5 years. 5 years ago the stock was trading at $99 a share. It is currently trading at $337.45 a share. That is very handsome returns offered to shareholders over the last 5 years.
But its not all moonshine and roses for the group. The image below, obtained from Google shows the price action of the group in after hours trading. And the stock plunged, with Ulta Beauty giving up over 20% of its share price. Guess Ulta investors will wake up this morning wondering of Ulta Beauty Inc is still a beautiful stock to be invested in.
Ulta Beauty Inc. (NASDAQ: ULTA) latest stock valuation
So based on their latest earnings report, and their earnings guidance provided and the market's knee jerk reaction in after hours trade to Ulta Beauty Inc. latest earnings report, what do we value the group's stock at? Our target price (full value price) for Ulta Beauty Inc is $224.90. The fact their earnings guidance was revised down by over 8% compared to the previous guidance provided and this takes into account a lot less shares in issue due to share repurchase program we believe the group is under significant pressure. With high levels of inventories we can see the group's margins coming under pressure as it looks to offload stock at discounted prices. At its current price $337.45 and even at its after hours traded price of $264) we believe the group's stock is overvalued. We see continued weakness in its share price until it reaches levels closer to our target or full value price.