Ulta Salon, Cosmetics & Fragrance, Inc. Trimming Estimates

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Ulta Beauty will report fourth-quarter results on Thursday after the markets close. Reflecting government data showing further moderation in the rate of growth in consumer spending (PCE) in the beauty category in January (likely at least in part because of widespread severe winter weather), we have elected to trim our fourth-quarter (January) EPS estimate by $0.01, to $1.07 (at the lower end of the $1.07-$1.10 guidance issued on December 5, 2013). Since we first trimmed our estimates for Ulta (along with several other retailers) back on January 14 (at which time the fourth-quarter consensus stood at $1.09), the majority of other analysts covering Ulta have also trimmed their estimates, and the consensus now also stands at $1.07.

We now estimate fourth-quarter comp-store sales of 6.0%-6.5%, below our prior estimate of 7.0%-7.5%, the current 6.7% consensus, and management’s 7%-9% guidance. Our comp projection represents a modest deceleration from the third quarter’s 6.8% gain, against a sequentially slightly easier comparison. We would not be surprised to see the company’s e-commerce business (included in reported comps and representing 2%-3% of total sales) pick up some of the slack from the estimated weather-related softness in store traffic.

The aforementioned government PCE data (which includes brick-and-mortar and e-commerce sales) suggests that spending growth in the United States within broader beauty-related categories slowed to roughly 2% in January from 2.0%-2.5% in December and 2.5%-3.0% in the preceding several months (see exhibits 1 and 2). Data from other retailers is somewhat mixed. Prestige beauty retailer Sephora experienced continued double-digit growth in its December quarter in the United States, although its quarter ended a month earlier and its trend had diverged a bit from Ulta in the prior quarter (Sephora accelerated moderately, while Ulta decelerated). Department store Macy’s (M $58.12) did not call out the overall cosmetics category in its fourth-quarter release or call, but it cited some sequential softening in fragrance. Prestige manufacturer Estée Lauder (EL $70.20) experienced acceleration in underlying growth in its Americas business relative to the September quarter on both a one-year and two-year basis, although manufacturer and retail trends do not necessarily correlate well in a given period.

We forecast gross margins to decline 10 basis points to 34.1% (versus guidance of flat), reflecting expectations of somewhat higher merchandise margins (driven in part by a greater mix of prestige brands) offset by fixed-cost deleverage. We estimate 40 basis points of SG&A deleverage, in part because of investments in store labor, supply chain, and e-commerce.

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