Can Ulta Beauty's (ULTA) Robust Strategies Offset Hurdles?

Ulta Beauty Inc. (NASDAQ:ULTA) has been gaining from its effective marketing initiatives, loyalty program, sturdy e-commerce business, superb salon operations and strength in prestige cosmetics. Additionally, favorable traffic is driving comparable store sales (comps) growth. The company’s notable growth in e-commerce sales has also helped it stand out amid intense online competition.

However, declining margins and stiff competition remain impediments. The company shares have declined 13.6% in the past three months, underperforming the industry’s growth of 19.8%.

Let’s delve deeper to analyze the pros and cons of this Zacks Rank #3 (Hold) company stock.

Splendid Earnings History & Robust Outlook

Ulta Beauty has maintained a solid earnings surprise trend having reported 16 straight quarters of earnings beat. Moreover, the company’s top line has surpassed estimates in 15 of the last 16 quarters. Of late, solid top- and bottom-line performances can be attributed to enhanced market share gains and benefits from attractive loyalty program offers. Additionally, the company is witnessing solid growth across all product categories with prestige cosmetics standing out. Further, robust traffic at stores is boosting comps, which improved double-digits in the most recent quarter.

Looking ahead, the company expects to deliver comps growth (including e-commerce) in the range of 10-11% for 2017. Meanwhile, it anticipates e-commerce sales growth in a range of 50-60%. Earnings per share are envisioned to grow in the high twenties percentage range.

Robust Online and Omni-Channel Growth

Ulta Beauty has garnered goodwill in a short span amid stiff competition because of its strategy of striking the right balance between online and physical stores. Also, the company has successfully managed to grow both e-commerce and in-store sales. Evidently, the company registered whopping 62.9% growth in e-commerce sales, which reflects about 370 bps of the total comps growth. The increase in e-commerce sales was driven by traffic growth of 57% and mobile traffic surge of 92%. The omni-channel customers now form nearly 9.1% of the company’s loyalty members compared with 7.5% in the year-ago period.

Effective Merchandise Initiatives

Ulta Beauty’s effective merchandising offerings largely contribute to growth of in-store sales. Notably, the company’s stores are a one stop shop for beauty enthusiasts, featuring prestige and discount beauty brands as well as offering salon products and services all under one roof. Also, the company remains keen on enhancing beauty products offerings and improving store traffic with superior services. In fiscal 2016, the company had added 69 new brands and executed more than 500 prestige brand expansions across new and existing stores.

Adding to its portfolio of prestige brands, the beauty retailer also rolled out Estee lauder’s (NYSE:EL) most popular MAC brand this year. Ulta plans to expand this to about 120 stores by the end of fiscal 2017.

Sturdy Loyalty Program

Ulta Beauty’s loyalty program was one of the major sales drivers in third-quarter fiscal 2017. Buoyed by its excellent marketing and merchandising endeavors and in-store conversions, Ulta Beauty saw 21% growth in Ultamate Rewards members to $26.4 million by the end of October. Moreover, sales per member, average member ticket, retention rates and frequency of shopping remained sturdy in the quarter.

Final Thoughts

While all seems well, Ulta Beauty witnessed a decline in both gross and operating margins in the fiscal third quarter. Also, the company is exposed to risk in the customer-driven industry as cheaper alternatives may hinder customers’ loyalty for the brand and thus impacting the sale of products under Ulta banner. Nevertheless, we believe the solid initiatives taken by the company will help it to overcome these hindrances.

Do Retail-Miscellaneous Stocks Grab Your Attention? Check These

Investors interested may consider Five Below Inc. (NASDAQ:FIVE) sporting a Zacks Rank #1 (Strong Buy) and Tractor Supply Company (NASDAQ:TSCO) carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Five Below delivered an average positive earnings surprise of 15.5% in the trailing four quarters. It has a long-term earnings growth rate of 28.7%.

Tractor Supply delivered an average positive earnings surprise of 1.6% in the trailing four quarters. In addition, it has a long-term earnings growth rate of 13.7%.

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