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Ulta cuts guidance as competition intensifies

AInvestFriday, Aug 30, 2024 10:41 am ET
2min read

Ulta Beauty's Q2 earnings report was marked by underwhelming performance, with both revenue and EPS falling short of expectations. The company reported earnings per share of $5.30, below the consensus estimate of $5.47, and a significant decline from the $6.02 recorded in the same quarter last year. Revenue rose modestly by 0.9% to $2.55 billion, also missing the expected $2.61 billion. A key metric, comparable store sales, declined by 1.2%, a stark contrast to the 8% increase in the prior year and below the anticipated 1.32% growth. This decline was driven by a 1.8% drop in transactions, only partially offset by a 0.6% increase in the average ticket.

The company’s gross margin also saw a decline, coming in at 38.3% compared to 39.3% in the prior year and slightly below the expected 38.8%. Ulta’s merchandise inventories rose by 10% year-over-year to $2 billion, reflecting investments in new brand launches, the opening of a new market fulfillment center, and the addition of 49 new stores. These inventory levels, combined with weaker-than-expected sales, suggest potential margin pressures moving forward as the company might need to engage in more promotional activity to clear excess stock.

Guidance for the full fiscal year was notably cut, reflecting the challenges Ulta is facing. The company now expects revenue in the range of $11 billion to $11.2 billion, down from its previous guidance of $11.5 billion to $11.6 billion. Comparable sales are projected to range from flat to a decline of 2%, a significant downgrade from the prior expectation of 2% to 3% growth. Additionally, EPS guidance was reduced to $22.60 to $23.50, down from the previous range of $25.20 to $26.00, indicating ongoing challenges in the second half of the fiscal year.

Several factors contributed to these disappointing results and revised outlook. The company cited increased competition, particularly from Sephora’s expanded presence within Kohl's stores, and the normalization of beauty demand after several years of robust growth. Additionally, operational issues related to the company’s ERP implementation and the underperformance of certain promotional activities further pressured sales and margins. These headwinds, combined with a more cautious consumer spending environment, have led to a more conservative outlook for the remainder of the fiscal year.

The market reacted negatively to these developments, with Ulta’s stock dropping 9% in premarket trading following the announcement. Analysts have responded by lowering their price targets and ratings. BMO downgraded Ulta to Market Perform and reduced its price target from $500 to $385, citing concerns over the competitive environment and uncertainties around the company’s ability to stabilize margins. Raymond James also lowered its price target from $500 to $450, although it maintained an Outperform rating, reflecting a more measured approach given the potential reset of long-term targets.

Overall, while Ulta Beauty remains a strong player in the beauty sector, the company faces significant challenges in navigating a competitive landscape, managing inventory levels, and restoring growth in the coming quarters. The revised guidance and recent performance suggest that investors should remain cautious as the company works to address these issues and regain momentum in a challenging market environment.

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