Analyst: Ulta's Q4 Report An Example Of 'Underpromise And Overdeliver'

After market close Thursday, Ulta Beauty Inc ULTA reported its fourth-quarter results and issued Q1 and fiscal 2017 guidance. Although earnings beat consensus estimates by more than 5 percent and a $425 million share buyback was announced, guidance was seen as soft, with the top end of Q1 sales forecast a little more than 20 percent under street estimates.

Shares of Ulta, after initially falling after-hours Thursday following the report, rebounded impressively Friday, even pushing the stock beyond its former all-time high. Instigating the rally was an announcement during the earnings conference call that Ulta had struck a deal to sell Estee Lauder Companies Inc EL's prominent MAC cosmetic brand online and in stores.

Expert Opinion

Benzinga spoke with Loop Capital analyst Anthony Chukumba, who'd highlighted the prospect of Ulta rolling out a new prestige brand in a recent research note. Through a telephone interview and email, Chukumba provided some context for the earnings and perspective on the MAC deal.

"Ulta has a long track record of beating consensus estimates by a pretty wide margin," Chukumba noted, "so the guidance shortfall wasn't concerning to me. I think they're just being conservative and trying to underpromise and overdeliver.”

Indeed, Ulta has beaten earnings estimates by more than 10 cents in three of its last five quarters. But for many investors, the MAC deal was even more impressive — the type of development sure to get the Street incrementally more positive on the name.

The Magnitude Of MAC

"MAC Cosmetics is one of the premier makeup brands," Chukumba explained, "so Ulta convincing Estée Lauder to allow the company to carry it is a real coup and will be a top-line growth driver."

Chukumba noted that the traditional distribution channel was high-end departments stores, but with everyone from Macy's Inc. M to Neiman Marcus floundering, more and more upscale brands may make the jump from brick and mortar to click-and-order.

"It's further evidence of how Ulta has become increasingly important to these high-end brands as the department stores continue to struggle," the analyst said.

In addition to MAC, more than 700 combined prestige boutiques will be added to its stores in the coming fiscal year, featuring offerings from Clinique, Lancome and others, Chukumba mentioned in a note Friday.

The Cost Of Beauty

Despite the attractiveness of Ulta Beauty as a company, the stock has a valuation only a hardcore bull could love. For this reason, Loop recommends awaiting a more attractive point of entry.

"I think — in terms of large-cap retailers — this is by far the premier fundamental story. Keyword[s] being 'fundamental story.' Valuation is still too expensive at these levels for me to be more constructive on the stock."

Loop maintains a Hold rating on Ulta, with a $285 price target. Shares of Ulta Beauty were up 3.8 percent at $284.16 Friday afternoon.