ULTA is Set to Soar

Joseph is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

ULTA Salon, Cosmetics, & Fragrance (NASDAQ: ULTA) is America's largest beauty retailer, but has not been treated like the powerhouse that it is lately. The company has faced two steep declines since Feb. 13  following its CEO stepping down and disappointing guidance. The stock had fallen 25.6% at one point, but has rallied nearly 5% since, and I do not think the rally is close to being over. 

Bye bye Chuck

On Feb. 14, Chuck Rubin announced he would be stepping down as Chief Executive Officer of ULTA to take a position at Michaels stores. This was just 4 months after ULTA's Chief Financial Officer, Bruce Hartman, resigned. With two of its top executives leaving, uncertainty set in, causing a downgrade by Credit Suisse, which sent the stock down 11.7%. The stock only rebounded 0.6% before getting hit again exactly one month later.

First quarter outlook

On March 14, ULTA reported fourth quarter and full year 2012 earnings. The numbers were strong, but guidance for the first quarter of 2013 fell below expectations. Here is the comparison:

  • ULTA sees first quarter earnings per share of $0.60-$0.63 vs. estimates of $0.72
  • Revenues are expected to be between $568-$577 million vs. estimates of $579.20 million
These projections caused the stock to fall 16.5% to its 52-week low. With both the CEO stepping down and the guidance miss, ULTA's stock fell 25.48% from Feb. 13 to March 15. This seemed to be the "perfect storm" of negativity.
<img alt="" src="http://g.fool.com/editorial/images/26782/screen-shot-2013-03-24-at-70038-pm_large.png" />

What was overlooked...

The fourth quarter earnings report, which included the first quarter guidance, contained numbers that exceeded expectations and showed a company with immense growth.

Here are the earnings that were overlooked:

  • Earnings per share of $1.00 vs. estimates of $0.98, up 37% year-over-year
  • Revenues of $758.8 million vs. estimates of $753.93, up 30.3% year-over-year
  • Fourth quarter same store sales increased 8%
  • Management sees 25-30% earnings growth in 2013

What matters more?

Earnings grew 41% from 2011, and I believe this is much more important than guidance for the next quarter. $0.63 per share in the first quarter would still be a strong 16.7% growth year-over-year. ULTA's growth is going to continue for the next several years, and this should be the focus of investors.

<img alt="" src="http://g.fool.com/editorial/images/26782/chartgo_large.png" />

  • 23.5% growth in 2013
  • 25.7% growth in 2014
  • 24.8% growth in 2015

Product growth within

The products ULTA carries have seen a flurry of growth as well. Ralph Lauren (NYSE: RL) currently has about 50 fragrance products carried by ULTA, more than any other brand. By having the largest offering, the company can continue to benefit from sales and store growth. This could be a primary reason for Ralph Lauren exceeding third quarter expectations and raising 2013 outlook on Feb. 6. The company reported earnings growth of 30% and net revenue growth of 2% year-over-year. From ULTA's side, the strength in Ralph Lauren's brand will help boost its sales. In biology terms, the relationship between the two companies is symbiotic.

Notable competitor

Sally Beauty Holdings (NYSE: SBH) reported good first quarter earnings on Feb. 7 and the stock is hovering around its 52-week high. Earnings increased 10.4% and revenues grew 4.7% year-over-year. These numbers are decent, but it is not a high-growth company like ULTA. However, since the growth has slowed, analysts are not as hard on this company as they are on ULTA. Sally Beauty is up an impressive 19.5% year-to-date, so this is a possible slow-growing alternative investment.

The Foolish bottom line

I believe the drop in ULTA is a buying opportunity. The stock has rebounded just 4.5% from its lows and I think the ride higher has just begun. Forget about the short-term issues the company has faced and focus on the long-term growth and where the company is headed. ULTA is a great value play at current levels.

Joseph Solitro 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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