Ulta Beauty will report first-quarter results on Tuesday, June 10, after the markets close. We see moderate upside to our EPS estimate of $0.74, which is in line with consensus and near the higher end of management’s $0.70-$0.75 guidance and represents 15% growth. We estimate a 6.8% comp-store sales increase (moderately above the 6.2% consensus forecast and near the upper end of management’s 5%-7% guidance) and believe there could be moderate upside to our forecast.
Some sequential deceleration from the fourth quarter’s 9.2% comps appears likely, as that result was aided by stepped-up promotion, comparisons with Hurricane Sandy, and a calendar shift. Still, we believe that weather likely was a sequentially smaller drag in the first quarter (particularly after mid-March, when guidance was provided). We project e-commerce sales growth of over 50%, which would translate to a contribution to comp sales of 100-150 basis points.
Government data suggests that growth of consumer spending in the United States within broader beauty-related categories was 2.9% in the February-April period (see exhibits 1 and 2, on page 2 and 3), still below the growth rates of 2010-2012 but moderately ahead of the January quarter’s 2.2% gain. Among retailers, prestige beauty retailer Sephora experienced a strong low-double-digit comp gain in the United States in its March quarter, similar to the December quarter. Among manufacturers, prestige manufacturer Estee Lauder (EL $76.60) experienced accelerated underlying growth in its Americas business relative to the December quarter on a one-year basis and steady growth on a two-year basis.
Our model assumes that gross margins decline 20-30 basis points to 34.7%, reflecting expectations that a continued positive mix shift (toward prestige color and skincare) could be offset by increased promotion year-over-year. Our gross margin estimate is modestly below the 34.9% consensus. We forecast a 50-basis-point increase in the SG&A expense rate (excluding pre-opening expenses) to 23.3%, reflecting stepped-up investments to 1) drive increased brand awareness, 2) support e-commerce growth (website functionality and supply chain fulfillment), and 3) increase store-level labor and training in support of prestige brand boutiques.
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