Analyst: Ulta Salon Is A Category Crusher

In a new report, The Buckingham Research Group’s Kelly Halsor took a close look at Ulta Salon, Cosmetics & Fragrance, Inc. (NASDAQ: ULTA)’s latest upbeat earnings numbers. Halsor also explained why Buckingham believes that it’s time to buy the stock.

The Numbers

Ulta’s Q2 earnings per share (EPS) of $1.15 came in ahead of consensus estimates of $1.12. In addition, the company reported better-than-expected comps of +10.1 percent and raised its fiscal 2015 and Q3 EPS guidance.

Halsor stated that Buckingham Research Group sees positive momentum for Ulta and believes that even the upped guidance remains on the conservative side.

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Specialty Beauty

The latest strong numbers from Ulta reinforce Halsor’s investment thesis concerning specialization within the category. “The fundamentals in the beauty category remain very strong and ULTA is gaining significant market share as women gravitate more toward the specialty channel for their beauty needs,” she explained.

Margin Pressure?

The one bump in Q2 earnings was a 0.40 percent decline in gross margins for the quarter. However, Halsor explained that this slight downtick is likely due to temporary supply chain investments. Ultimately, she expects these investments to pay off by generating at least $7 in EPS for Ulta by 2017.

Outlook

Following the earnings report, Buckingham reiterated its Buy rating on Ulta and raised its price target from $182 to $187. The new price target is based off of 29x Buckingham’s 2017 earnings estimate of $6.90 discounted back one year based on the company’s weighted average cost of capital.

If the company maintains its five-year average multiple of around 30x, Halsor believes that inflections in both margins and free cash flow could drive the share price as high as $240 before 2018.

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