Ulta Beauty’s (NASDAQ:ULTA) Q2 results were nothing short of spectacular. In this article, I’ll be breaking down the beauty retailer’s second-quarter earnings and why I’m still a massive Ulta bull.
Yet Another Great Earnings Report
Surprise, surprise – another earnings beat from Ulta Beauty, and another reason to own shares.
Ulta once again posted record-breaking numbers and increased its guidance in the quarter.
- Q2 Non-GAAP EPS of $5.69 (vs. $4.52 Y/Y) beats by $0.70.
- Revenue of $2.3B (+16.8% Y/Y) beats by $100M.
- Comparable Sales Increased 14.4%
Not only did Ulta beat expectations, but again increased full-year revenue, EPS, and CAPEX guidance for the latter half of 2022.
Ulta is known for providing conservative guidance and then increasing expectations as it gains more clarity heading towards the end of the fiscal year. However, management continues to meet and exceed expectations, navigating headwinds effectively.
While we continue to face uncertainties in the current macro environment, we are focused on delivering great guest experiences and driving sustained profitable growth. Longer-term, we believe the beauty category will continue to be resilient, and we are confident that we are differentiated and proven model and growth strategycombined with our outstanding associates will continue to position Ulta Beauty as the preferred beauty destination.
Growth on All Fronts
In a time of difficulty for corporate America, Ulta continues to show growth on all fronts. Once again, comparable sales were up 14.4% this quarter compared to the consensus of 10.3%. While Q2’21 saw comparable sales of a whopping 56.3%, the inflated number was due to a temporary COVID rebound.
The 14.4% comparable sales prove Ulta’s strong business model and ability to generate sales from its existing stores. Furthermore, Ulta opened 7 net new stores in the second quarter, running its total count to 1,325.
With macro-headwinds followed by COVID-19, this may be one of the toughest environments any retailer has had to face in recent memory. Only a few days ago, the market saw leading off-price retailer Nordstrom (JWN) tank after weaker-than-expected earnings and reduced store traffic.
However, the beauty of Ulta’s growth is that the company is not solely reliant on one segment to generate robust growth. Ulta generated robust growth across all of its operating segments – Cosmetics, haircare, skincare, and fragrance.
Deriving 43% of ULTA’s revenue, the cosmetics segment delivered double-digit comp growth in both mass and prestige categories. Ulta’s introduction of new brands and ability to generate sales off of existing brands continue to be the backbone of Ulta’s sales.
CEO Dave Kimbell stated on the Q2 earnings call that:
Guests continue to engage with new brands like Fenty Beauty, REM Beauty and recently launched about-face by Halsey while new products from established brands like Clinique, NYX, elf and ColourPop also contributed to the sales growth. In addition, the ongoing expansion of MAC and CHANEL Beauty into more stores contributed to the strong Prestige performance.
Within haircare, Ulta’s Gorgeous Hair Event shows its commitment to engaging its already loyal customer base.
our semiannual Gorgeous Hair Eventa strategic event designed to acquire new guests, increase existing member spend and drive salon penetration.
Skincare was Ulta’s strongest revenue growth segment for 2 primary reasons.
- New brands
- Educational Content
newness continued to appeal to guests with newer brands such as Drunk Elephant, Fresh, Supergoop and recently launched Vacation as well as new products from PEACH & LILY, OSEA and Hero Cosmetics contributing to category growth during the quarter.
Also, Ulta does not solely rely on new and existing brands to retain customers but also focuses on promotional events and beauty content to further engage customers.
Skinfatuation our monthly skincare programwhich works to demystify skincare with educational content and focused themes delivered nice growth for established brands like Tula, Sun Bum, Kola and Good Molecules.
Ulta’s shop-in-shop partnership with Target (TGT) is also a key lever of growth, with a long-term target of 800 total Ulta in Target locations. In the second quarter, Ulta opened 59 Target shops, increasing the total to 186 locations.
Customers Will Pay
As inflation continues to hit the economy with full force, customers are becoming more selective as to what they spend money on. As brands continue to increase their prices due to rising input costs, Ulta must follow suit to maintain its margins.
we have received a large number of price increases from our brand partners in the first half of this year. Given ongoing cost pressures facing our brand partners, we expect to receive additional increases as we move throughout the rest of the year.
However, Ulta showed that their customers are still willing to shop despite the modest price increases.
When CEO Dave Kimbell was asked about any resistance from customers, his answer focused on strong growth across all categories and income levels.
We’re not experiencing that or seeing that at this time, similar to what we talked about last quarter. We’re seeing strong growth across all aspects of our business. As I mentioned, every category performed in double digits, strength across channels, stores, e-comm services. And as we look at the income levels of our guests, we’re seeing healthy growth at all income levels. So no real signs or signals of trade down within the marketplace yet.
As a company, Ulta is clearly confident in navigating inflationary headwinds. As mentioned in my first Ulta article, the cultivation of a loyal customer base is a key component of the investment thesis for Ulta. Its best-in-class loyalty program retains customers and increases their willingness to pay a slight premium.
Ulta’s second quarter proved that the beauty retailer would be able to navigate macroeconomic headwinds thrown its way.
Committed to Buybacks
Ulta’s business model is fairly simple with respect to generating cash. It allocates a portion for CAPEX, retains a healthy sum of cash to keep on the balance sheet, and repurchases stock with the rest. As depicted below, Ulta has committed to reducing the outstanding share count as a form of capital allocation.
Additionally, Ulta is prudent with CAPEX as a % of revenue, down from 8% in 2014 to a mere 2% in 2022.
In F’21, Ulta had a cash balance of slightly over $430 million on its balance sheet with zero long-term debt.
Trading at 20x earnings, Ulta is not an overpriced stock. While its peers trade for lower multiples, Ulta’s industry leadership and growth rates justify the premium valuation. Analyzing specialty retail leaders such as Lululemon (LULU) which trade at ~40x earnings, Ulta is quite cheap on a relative basis.
Trading below its pre-COVID average PE ratio, Ulta’s valuation is not a cause for concern. On the contrary, investors may even see the current multiple expand in the future if Ulta continues to pull the right growth levers.
Future Looks Bright
All in all, Ulta finished the quarter with another stellar earnings report. Beating expectations, raising guidance, growing in all categories, and buying back shares are all exceptional signs for shareholders indicative of a bright future.
Furthermore, Ulta has not even begun to tap into international markets yet, focusing completely on dominating the US market via store growth, brand depth, and customer loyalty – all of which will supercharge Ulta’s future growth.
As long as it continues to focus on its expansion plans and exceed expectations, the future will be bright for the retailer. Hence, I reiterated my “Buy” recommendation for Ulta.