For the second straight quarter, Ulta Beauty (NASDAQ: ULTA) lowered its full-year guidance. While its share price fell on the news, the stock held up pretty well given the pressures the beauty products retailer has been seeing, likely helped by a recent investment from famed investor Warren Buffett .
With the stock down more than 25% on the year, let's take a closer look at its most recent earnings report and guidance and see if investors should follow Buffett into the name.
Lowered guidance once again
For its fiscal second quarter, ended Aug. 3, Ulta's revenue rose 0.9% to $2.6 billion. Same-store sales , however, fell 1.2%, a big reversal from the 8% increase it saw a year ago. Transactions decreased by 1.8%, while average ticket rose 0.6%.
Fragrance was a once again its strongest category, seeing double-digit comparable-store sales growth. Skincare also saw solid growth, up mid-single digits. Makeup comparable-store sales remained a weak spot, falling mid-single digits, while haircare same-store sales fell by high single digits.
The retailer's gross margin dropped by 100 basis points to 38.3% due to a lower merchandise gross margin and deleveraging due to lower comparable-store sales. The company did, however, see lower inventory shrink, which is an issue that has been plaguing brick-and-mortar retailers in recent years. Shrink is the loss of merchandise due to things like theft, damage, or cashier error, and retailers have been the victims of increasing theft over the past few years.
Earnings per share (EPS) fell from $6.02 to $5.30 due to a weaker gross margin and higher expenses, with selling, general, and administrative (SG&A) expenses rising by more than 7% year over year.
Ulta reduced its full-year outlook once again. It now expects revenue to come in a range between $11 billion and $11.2 billion, with same-store sales flat to down 2%. This is lower than its previous guidance calling for revenue of $11.5 billion to $11.6 billion, with same-store sales growth of 2% to 3%. Ulta also reduced its EPS forecast from a range of $25.20 to $26 to a new outlook of between $22.60 and $23.50.
| Metric | Original Guidance | Previous Guidance | New Guidance |
|---|
| Revenue | $11.7 billion and $11.8 billion | $11.5 billion and $11.6 billion | $11.0 billion to $11.2 billion |
| Same-store sales | 4% to 5% | 2% to 3% | -2% and 0% |
| Earnings per share | $26.20 to $27 | $25.20 and $26 | $22.60 to $23.50 |
Data source: Ulta Beauty.
The lowered guidance stems from the company's first-half performance, as well as the continued competitive intensity it is seeing. With sales lower and the promotional environment increasing, it also anticipates pressure on its operating margin.
The company noted that about 80% of its stores have been impacted by at least one competitive opening in the past few years, while half have been affected by multiple competitive openings. This is hurting it largely in the prestige beauty category, where 1,000 new points of distribution have opened in the past three years.
Should investors buy the dip?
Ulta had been one of the best stories in retail for many years, but its stock has stalled over the past few years as competitive pressures continue to intensify. The combination of increased competitive store openings, tough comparisons, and a more cautious consumer appears to be catching up with the retailer.
It is still is a solid growing category and the company has levers to pull with marketing, digital enhancements such as new personalized product recommendations, and by adding new brands to its stores. However, the competitive headwinds are unlikely to go away as LVMH Moët Hennessy - Louis Vuitton continues to expand Ulta rival Sephora to great success across the U.S.
Trading at a forward P/E of 13.5 next year's projected earnings based on analyst estimates, the stock is attractively valued for a retailer in a relatively recession-resistant category.
ULTA PE Ratio (Forward 1y) data by YCharts
While it's not my favorite consumer products stock out there, I do think the stock will perform well over the long term as the leader in the beauty retail category. Meanwhile, it appears Buffett's investment in the stock has helped put a floor under the stock, at least in the near term.
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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Ulta Beauty. The Motley Fool has a disclosure policy .
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