ULTA Salon Looks Set to Rocket Higher

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ULTA Salon Cosmetics & Fragrance Inc. (NYSE:ULTA) may not be a household name, but its stock is set to roar higher. The company’s stores offer an assortment of branded and private label beauty products in cosmetics, fragrance, haircare, skincare, bath and body products, and salon styling tools. The company’s cosmetics include products for the face, eyes, cheeks, lips, and nails. Its haircare products comprise shampoos, conditioners, styling products, and hair accessories.

It also offers salon styling tools, such as hair dryers, curling irons, skincare products, and bath and body products, which consist of products for the face, hands, and body. It offers a complete line of fragrances and also provides nail polish and nail care products. Finally, it also offers candles, home fragrance products, and other health and beauty products. It operates just under 700 retail stores in 46 states. It also operates full-services salons in its stores, offering haircuts, hair coloring, and permanent texture, as well as facials and waxing, not to mention it distributes its products through its website, ulta.com. The stock is set to rocket higher on the back of incredible earnings and guidance.

In its first quarter, net sales increased 22.5 percent to $713.8 million from $582.7 million in the first quarter of fiscal 2013. Comparable store sales increased 8.7 percent compared to an increase of 6.7 percent in the first quarter of fiscal 2013. Its e-commerce comparable sales grew 72.3 percent, representing 190 basis points of the total company comparable sales increase of 8.7 percent. One small negative was that gross profit decreased 50 basis points to 34.5 percent from 35 percent in the first quarter of fiscal 2013, primarily driven by product and channel mix shifts, converting the remaining 50 percent of the loyalty program members to the ULTAmate Rewards program, and deleverage of fixed store costs resulting from a large number of new stores in the portfolio.

Expenses as a percentage of net sales was equal to first quarter of fiscal 2013 at 22.8 percent. One important metric, preopening expenses, decreased to $2.6 million, compared to $3.2 million in the first quarter of fiscal 2013. Real estate activity in the first quarter included 21 new stores compared to 28 new stores in the first quarter of fiscal 2013. The company’s operating income increased 19.5 percent to $80.9 million, or 11.3 percent of net sales, compared to $67.7 million, or 11.6 percent of net sales, last year, while net income increased 19.4 percent to $50 million compared to $41.8 million in the first quarter of fiscal 2013. Finally, income per diluted share increased 18.5 percent to 77 cents compared to 65 cents in the first quarter of fiscal 2013.

CEO Mary Dillon said: “Ulta Beauty delivered strong sales and earnings growth in the first quarter. The team’s accomplishments included improving retail transactions which turned positive, driving continued momentum in our online business, successfully rolling out new brands, completing a smooth conversion of our loyalty program members onto one platform, and managing inventory very well.”

What’s really propelling the stock is improved outlook. For the second quarter of fiscal 2014, the company currently expects net sales in the range of $706 million to $717 million, compared to actual net sales of $601 million in the second quarter of fiscal 2013. Comparable store sales for the second quarter of 2014 are expected to increase 5 percent to 7 percent. The company reported a comparable store sales increase of 8.4 percent in the second quarter of 2013. Income per diluted share for the second quarter of fiscal 2014 is estimated to be in the range of 78 cents to 83 cents. This compares to income per diluted share for the second quarter of fiscal 2013 of 70 cents. These growth metrics are incredibly strong, and as such the stock is a buy and should approach $100 in the coming weeks.

Disclosure: Christopher F. Davis holds no position in ULTA Salon and has no plans to initiate a position in the next 72 hours. He has a buy rating on the stock and a $104 price target.

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