Ulta Beauty (NASDAQ: ULTA) Shares Surge 14% on 200% E-Commerce Growth

Ulta Beauty NASDAQ: ULTA shares are set to open more than 14% higher after the company reported Q2 earnings after the bell yesterday.

ULTA’s sales came in at $1.2 billion, which was down 28% yoy and came in below expectations of $1.25 billion.

But earnings blew away consensus estimates; ULTA reported 73 cents a share vs. estimates of 8 cents a share. Earnings were, however, down a lot from the $2.72 a share reported in the year-ago quarter.

E-Commerce Preparation Pays Off

In 2020, the word “preparation” has often been associated with images of people rushing to supermarkets to stock up on toilet paper.

But some companies realized the e-commerce boom was here to stay and took steps to prepare for a future dominated by online shopping – Ulta Beauty was one of them.

Of course, few saw the pandemic coming. But the monumental shift towards e-commerce has merely been an acceleration of an existing trend.

In Q2, ULTA’s investment paid off, with e-commerce sales more than tripling yoy.

But Same-Store Sales Dipped 26.7%

Here are a few numbers in ULTA’s Q2 earnings release:

• Same-store sales dipped 26.7%
• Transactions fell 36.2%
• Average purchase size up 14.9%

It’s clear that customers are making fewer trips to physical locations and buying more each time. This shouldn’t come as much of a surprise, with people seeking to limit their exposure to the coronavirus.

While ULTA’s e-commerce performance was excellent in Q2, its salon services must be done in-person.

Furthermore, even though cosmetics can be sold online, many customers prefer to buy those in person. And with people going out a lot less than before, cosmetics demand is currently lower than it was pre-pandemic.

All that said, ULTA’s sales are trending in the right direction. Comps were down 37% yoy in May, but were down just 10% yoy in July. And during the first three weeks of August, comps were down in the mid-single digits compared to the same period a year-ago.

Long-Term Outlook Remains Solid

Note that ULTA’s fiscal year is exactly a year ahead of the actual year. For example, the results reported yesterday were for Q2 2021.

With that in mind, let’s look at ULTA’s long-term trajectory.

In fiscal 2020, ULTA reported EPS of $12.15. In fiscal 2021, that number is expected to dip to $4.21.

But in fiscal 2022, earnings are projected to come in at $11.01. And in fiscal 2023, earnings are expected to grow around 13% to $12.45.

Estimates Could See Upward Revisions

Based on the estimates, ULTA is trading at around 23x projected fiscal 2022 earnings and 21x projected fiscal 2023 earnings. The numbers would be very reasonable, if you took them at face value.

But the estimates seem a bit low, and likely don’t fully factor in ULTA’s stellar e-commerce outlook.

You may be thinking:

The e-commerce sales are cannibalizing the in-store sales. If in-store fully recovers, e-commerce won’t maintain its pandemic-levels, let alone continue to expand.

And that’s probably true – to an extent.

But ULTA has proven itself as a strong online player in the beauty retailer space. It’s more likely that its online operations will cut into its competitors’ businesses more than its own in-store operations.

Furthermore, cosmetics is a growing industry.

If ULTA can cut into its competitors’ businesses in a growing industry, you don’t need me to tell you what’s going to happen.

Where Can You Get In?

ULTA should open right around its post-pandemic highs today. The move will take shares above the 200-day moving average, where they had languished for the past 2+ months.

I’d look for a ~2 week consolidation around today’s open, followed by a convincing breakout. That would create a bullish flag pattern, which often precedes very powerful moves.

There would still be a lot of resistance overhead, as prior to the pandemic, ULTA traded above $300 a share for much of 2019 and briefly in February 2020. But if the bullish flag pattern comes to fruition, the odds would be good on ULTA having the juice to overtake those long-term highs.

ULTA is a Solid Long-Term Play

ULTA has dealt with its share of struggles in 2020. But its upside potential in 2021 and beyond is clear after yesterday’s earnings release.

Even though shares are set to increase a lot today, ULTA still has plenty of room to run.