Should You Buy the Ulta Beauty Post-Earnings Dip?

Ulta Beauty NASDAQ: ULTA reported its fourth-quarter earnings on Thursday, March 11, and investors were disappointed with the results; shares are down more than 8% since then.

The beauty retailer’s fourth-quarter revenue was down 4.6% yoy to $2.2 billion, but that beat expectations of $2.08 billion. Adjusted earnings per share dipped from $3.83 to $3.41, but also came in ahead of the $2.35 that Wall Street had modeled.

This doesn’t seem like a case of sky-high whisper numbers though. There were two clear reasons for the sell-off:

1. Ulta’s 2021 guidance was worse than expected. The company is expecting revenue of $7.2 billion to $7.3 billion for full-year 2021. That is well above the $6.15 billion of revenue generated in 2020, but fell short of analyst estimates for $7.32 billion. Management projected earnings per share of $8.85 to $9.30, nearly double the $4.66 reported for full-year 2020 at the high-end, but much lower than the consensus of $10.61.
2. Mary Dillon will step out of her CEO role in June, with current President Dave Kimbell set to replace her. Dillon’s departure came as a surprise to almost everyone and rattled investors; you don’t want to see a leadership change at such a pivotal time for a company.

 Kimbell has been with Ulta since 2014, and seems well-equipped to handle the CEO role, so the concern surrounding Dillon’s departure will likely dissipate over time.

The 2021 guidance is another story; it indicates that Ulta won’t reach pre-pandemic heights until at least 2022.

In 2019, Ulta generated $7.4 billion in revenue, above the high-end of the 2021 guidance. The company’s operating margin was 12% in 2019, but is expected to come in at around 9% in 2021. The beauty retailer is also planning to expand at a slower rate than it was pre-pandemic. In 2019, Ulta added 86 new stores. Ulta plans to open just 40 new stores in 2021.

The company is projecting comps to grow by 15% to 17% for full-year 2021. Sounds pretty good, right? At first yes, but not when you drill down into the quarter-by-quarter breakdown. CFO Scott Settersten spelled it out on the Q4 earnings call:

“We expect comp results will vary significantly between the front half and the back half of the year as we lap store closures that occurred in the first half of 2020. With this in mind, we anticipate comp growth will be in the low to mid-30s for the first half of 2021 and then moderate to low-to-mid-single-digit growth for the second half.”

So, most of the growth will come in the first half of 2021, when Ulta will face easy comps from the first half of 2020. The beauty retailer is looking at tougher comps in the second half, but comps were still down mid-to-high-single-digits in Q3 and Q4 2020. The modest growth projection for the second half of 2021 seems underwhelming when you look at it that way.

Ulta’s e-commerce performance has been impressive though.

 Over the last year, it has become clear which companies focused on their e-commerce businesses prior to the pandemic and which ones didn’t. Ulta is in the former category, and has been rewarded for its foresight.

Following Ulta’s second-quarter earnings release, shares surged on news that the beauty retailer grew its e-commerce sales by 200% yoy. That growth has slowed over the last two quarters; 90% yoy in Q3 and 72% yoy in Q4. But that’s not a bad thing. Far from it.

Ulta’s in-store sales have increased by more than the e-commerce sales have decreased. As long as the beauty retailer can keep that going, investors will happily accept an e-commerce slowdown.

How Should You Play Ulta?

Ulta is in worse shape than it was in back in 2019, but shares are up nearly 26% since the beginning of 2020. At the same time, shares are getting defended at the 50-day moving average, which could lead to a retest of the $350 range.

ULTA could very well see a 7-10% bounce over the next couple of weeks. But a sustainable rally seems unlikely with the fundamentals looking dicey.

This is a solid company that could see a strong rebound in 2022, but you’re not getting enough of a discount to compensate you for the risk that it doesn’t happen. It may be best to sit on the sidelines and wait for a bigger pullback before getting into ULTA.