What to look for when Ulta Beauty (ULTA) reports Q3 earnings

Ulta Beauty Inc. (NASDAQ: ULTA) is set to release its earnings results for the third quarter of 2019 on Thursday after the bell. The stock is recovering from the weakness in the cosmetics market, which dragged the shares down by 30%. The bottom line will be hurt by higher costs and expenses while the top line will show a lesser growth than last quarter.

The company has been planning to capture additional market share in the industry. This could be achieved by expanding US beauty products and salon services industry, the shift in the distribution channel of prestige beauty products from department stores to specialty retail stores, as well as Ulta Beauty’s competitive strengths.

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Ulta Beauty’s long-term growth strategy is to lift net sales through growths in comparable sales, opening new stores, and rising omnichannel capabilities. The ability to expand merchandise margin and leverage fixed store costs with comparable sales increases and operating efficiencies could be driving operating profit higher in the long term.

The company’s successful marketing and merchandising strategies could be driving comparable sales higher. The gross margin will be driven by an improvement in merchandise margins and leverage in fixed store costs attributed to the impact of higher sales volume. The salon services investments could be narrowing the gross margin growth.

Analysts expect the company’s earnings to decline by 2.30% to $2.13 per share while revenue will increase by 9% to $1.7 billion for the third quarter. The company has surprised investors by beating analysts’ expectations thrice in the past four quarters. The majority of the analysts recommended a “hold” rating with an average price target of $276.96.

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For the second quarter, Ulta Beauty posted a double-digit increase in sales and profit, continuing the recent trend. Profit increased by 9% driven by a 12% annual growth in net sales. Comparable store sales were up 6.2% year-over-year.

For fiscal 2019, the company expects earnings of $11.86-12.06 per share and comparable-store sales in the range of 4-6%. Capital expenditures are anticipated to be in the range of $340-350 million for the full year. Over the long term, the company believes the continued market share gains and strong returns could be driven by its guest-centric differentiated business model.

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