On Thursday evening Ulta Beauty ( ULTA) released its fiscal third-quarter results. On a night when the ugly stick was out and about, hunting the stocks of several other names reporting, Ulta came out, well... beauteous by comparison.
For the three-month period ended October 30, Ulta reported GAAP earnings of $3.54 per share, crushing expectations by about $1.20. Ulta also beat Wall Street expectations on the top line, showing revenue of $2.339B.
Comp sales increased 14.6%. Gross profit margin widened to 41.2% from 39.6% as operating margin improved to 15.5% from 14.2%. Net income rose 27.5% to $274.585M, which came to 11.7% of revenue generated.
Impressive Guidance
This is so impressive. I want readers to take a look at these upward revisions. For the full year, ULTA now sees...
Revenue generation of $9.95B to $10B -- up from prior guidance of $9.65B to $9.75B.
Comp sales of 12.6% to 13.2% -- up from prior guidance of 9.5% to 10.5%.
Operating margin of 15.5% to 15.6% -- up from prior guidance of 14.6% to 14.8%.
GAAP EPS of $22.60 to $22.90 -- up from prior guidance of $20.70 to $21.20.
Capital Expenditures of $300M to $350M -- down from prior guidance of $350M to $400M.
A Well-Managed Balance Sheet
Ulta ended the quarter with a net cash position of $250.628M and inventories of $2.115B. This brings current assets to $2.746B. Current liabilities add up to $1.698B, including $312.132M of deferred revenue. No short-term debt. The company's current ratio stands at a very healthy 1.62.
Ex-inventories, Ulta's quick ratio would stand at 0.37. I am just not sure that it is fair to run a quick ratio for Ulta as in normal times we do not run "quicks" on retailers due to the inventory-heavy nature of the business. We have been doing so late in 2022 as so many retailers have either simply over supplied themselves, ordered the wrong inventories or just mismanaged inventories. Ulta does not seem to have a problem executing the business at an elite level.
Total assets amount to $5.332B. Goodwill and other intangibles add up to just $11.714M, hardly worth mentioning. Total liabilities less equity comes to $3.409B of which $1.621B is in non-current lease obligations.
There is no long-term debt or any debt of any kind on this balance sheet. Read that last sentence twice if you have to. This balance sheet is exceptionally well-managed.
What Wall Street Thinks
I have only found five sell-side analysts that are rated at four or five stars at TipRanks who have also opined on Ulta since last night. After allowing for changes, all five rate the stock as a "buy" or their firm's "buy-equivalent."
The average price target across the five is $548 with a high of $607 (Krisztina Katai of Deutsche Bank) and a low of $503 (Oliver Chen of Cowen & Co). Omitting these two as outliers brings the average of the other three down to $543.
My Thoughts
This company is running hot. CEO Dave Kimball summed it up in the conference call: "All major categories exceeded our expectations, and we increased our market share in Prestige beauty versus the fiscal third quarter last year based on dollar sales according to point-of-sale data from the NPD Group. We delivered growth across our store and digital channels and achieved record loyalty membership of 39M members."
Now how to go about getting long these shares...
The stock does trade at 22 times forward-looking earnings and does not pay out a shareholder dividend, just in case those items scare anyone off.
Readers will quickly see that from early September through the present, ULTA has built a cup pattern. Given the height of the right side of the cup, the duration of the positive-looking daily Moving Average Convergence Divergence (MACD) and the "overbought" looking Relative Strength Index RSI, it stands to reason that the idea that ULTA might add a handle to this cup is probably a bit overdue.
What I would like to do is not just to pay up for the equity because I am impressed. It stands to reason that at some point, the shares will drop to meet the 21-day exponential average (EMA) as the 21-day EMA rises to meet the shares. Right now, the 21-day EMA stands at $442, so that's where we start.
Does going out two weeks in expiration and selling $445 puts expiring on December 16 for about $3.05 make sense? If it does, I would be inclined to purchase a like amount of December 16 $435 puts for roughly $1.70 just so my whole portfolio doesn't get blown up if I get run over. That's a net debit of $1.35 on the options, and a net basis of $443.65 if the trade ends up with a purchase of the equity in two weeks.
Bottom Line
Ulta is all aces right now, and I do think I want to own the equity. I just think that I can probably show a little finesse in getting there.
