Unfavorable trends in the cosmetics market along with rising SG&A expenses are deterrents for Ulta Beauty, Inc. ULTA. These challenges compelled management to curtail sales and earnings guidance for fiscal 2019 during its last earnings call.
The downsides have dented investors’ sentiments, as shares of the beauty company plunged 33.4% in the past three months compared with the industry’s decline of 16.4%. Let’s take a closer look at the factors hurting this Zacks Rank #5 (Strong Sell) company.
What’s Ailing the Stock?
Ulta Beauty has been struggling with rising SG&A expenses for a while, which are exerting pressure on the company’s operating margin. Notably, operating margin contracted 50 basis points (bps) to 12.5% during the second quarter of fiscal 2019. A rise of 90 bps in SG&A expenses, as a percentage of sales, negatively impacted operating margin during the quarter. Further, the company expects operating margin deleverage of 60-70 bps for fiscal 2019.
The company’s expenses are usually associated with higher store labor and investments. Notably, increased investments toward digital channels, salon services, infrastructure, personalization efforts, brands and initiatives to enhance customer experience lead to higher corporate overheads. In fact, investments in salon services put pressure on gross margin in the fiscal second quarter, with the top and the bottom line missing the Zacks Consensus Estimate.
This apart, management is seeing certain headwinds and uncertainties in the U.S. cosmetics market. We note that the makeup industry has been decelerating of late, primarily due to consumers’ growing preference for skincare products.
All these factors compelled management to cut its view for fiscal 2019. For the fiscal, management projects total sales to increase 9-12% compared with the previous guidance of growth in the low-double-digits percentage range. Further, earnings per share are envisioned in the range of $11.86-$12.06. Earlier, the company projected earnings in the band of $12.83-$13.03 per share.
Although Ulta Beauty’s growth efforts like the Loyalty Program and omnichannel strategies look encouraging, they are yet to pare this beauty retailer’s woes.
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