Ulta Punished for Modest Earnings Beat

Ulta Beauty (ULTA) stock plummeted more than 8 percent on Friday morning after the company reported second-quarter earnings and revenue that topped consensus analyst expectations. Ulta also raised its full-year guidance, but investors were hoping for something more than a modest beat from the cosmetics retailer.

On Thursday afternoon, Ulta reported Q2 EPS of $1.83 on revenue of $1.29 billion. Both numbers slightly topped consensus analyst estimates of $1.78 and $1.28 billion, respectively. Same-store sales were up 11.7 percent compared to 14.4 percent in the same quarter a year ago.

Ulta now expects full-year EPS growth in the “high-20s percent range, compared to previous guidance of mid-20s percent range.” Ulta is calling for full-year same-store sales growth ranging from 10 to 11 percent, up from previous guidance of 9 to 11 percent growth.

In a new note to clients on Friday, BMO Capital Markets analyst Shannon Coyne says there were simply not enough positives in Ulta’s Q2 report to outweigh the challenging environment the company is facing. Coyne says competition from Sephora, Macy’s (M), Amazon.com (AMZN) and others is about to start heating up.

“We believe the story is shifting to a market share war from market expansion coupled with complacency on the part of competitors, and results are closer to reverting to the mean than before, raising the risk profile for the stock,” Coyne says.

“As Sephora expands to off-mall sites, Macy’s accelerates its BlueMercury expansion, and Amazon potentially gains access to prestige brands while providing indie brands a platform to reach new customers, we believe Ulta’s current competitive moat could recede over the next 12 to 24 months.”

Jefferies analyst Stephanie Wissink says investors aren’t fully appreciating Ulta’s impressive growth in a difficult retail environment.

“Our multi-year growth thesis is unchanged, and we are incrementally more confident in the company’s ability to balance sales and margin drivers following Q2,” Wissink writes.

BMO has downgraded…

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