Analysts: Ulta Beauty's Drastic Second-Half Guidance Cut A Blemish For Retailer

Ulta Beauty Inc ULTA shares tumbled to an eight-month low Friday in reaction to the retailer's second-quarter results, which revealed earnings and revenue misses as well as lower full-year guidance.

The Analysts

Piper Jaffray analyst Erinn Murphy downgraded Ulta from Overweight to Neutral and reduced the price target from $360 to $250.

Credit Suisse analyst Michael Binetti maintained an Outperform rating and lowered the price target from $380 to $286.

Muted Visibility Keeps Piper Jaffray On The Sidelines

It's not the second quarter that causes concern, but rather what is implied for the second half, which could bleed into the first half of next year, Murphy said in a Thursday note.

Comps have been revised below the long-term target, and as opposed to the long-term EPS growth target of 20%, the guidance for the second half implies low-single-digit EPS growth, the analyst said. 

The cosmetics category, accounting for over 50% of sales, showed volatility in July, with the quarter-to-date trends also remaining soft, Murphy said, citing Ulta. 

The ticket growth of 0.8% was the lowest in seven years, but transactions grew 5.4%, supporting a 6.2% rise in comps, Murphy said. 

The analyst attributed the weak ticker growth to lower units per transaction and higher promo activity.

" ... Ongoing deceleration in color cosmetics could further moderate loyalty adds in the 2H, which would in turn hurt comp." 

Piper Jaffray significantly reduced its estimates for the third quarter and beyond.

"While management continues to focus on bringing several new brands into stores, which has proven successful, historically we prefer to sit on the sidelines during this period of muted visibility," the analyst said. 

Credit Suisse: Magnitude Of Guidance Cut Perplexing

The reason why Ulta cut the second-half guidance so significantly after what sounded like a very short-term change in the trend line is unclear, Binetti said in a Thursday note. 

This is particularly surprising, because the company has navigated and managed to grow through very sluggish prestige color cosmetic trends for two years, the analyst said. 

Credit Suisse lowered its 2019 EPS guidance from $13.08 to $12 and forecast third-quarter EPS of $2.15, based on 3.3% comp. growth and a 10-basis point expansion in gross margin.

Binetti said he expects comps and gross margin to accelerate slightly in the fourth quarter as the innovation launch pipe accelerates.

"While we have concerns that ULTA can deliver on a 4Q SSS re-acceleration, we think our multi-year EPS update already embeds much more conservative trends for the category." 

The Price Action

Ulta shares were down 29.33% to $238.49 at the time of publication Friday, their lowest level since Dec. 27, 2018.

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