What to do with this? Ulta Beauty (ULTA) turned into Ulta Ugly almost overnight. In fact that's exactly what happened. The firm gave investors a lot to think about after Thursday's closing bell. First, the firm reported fourth quarter performance that was in many ways was better than expected. Then, the forward looking guidance was not nearly as strong as many had hoped. Then the cherry on top. Highly respected CEO Mary Dillon has decided to call it a day (in June), and hand over the reins to current company President David Kimbell. Dillon will stay on to chair the Board of Directors.
My own thoughts? I don't know, I have never really given physical beauty all that much thought, but one would think that reopening an economy would be highly positive for a retail chain specializing in looking good at work, at play, and on the go. Nobody's been on the go in a year, and I don't think too many folks care how they look on Zoom Video (ZM) .
For the fourth quarter, Ulta Beauty reported adjusted EPS of $3.41 on adjusted net income of $193.4 million, or GAAP EPS of $3.03 on GAAP net income of $171.5 million. Regardless of how one slices rye bread, this was a sizeable beat of consensus view, despite the fact that even the adjusted EPS number amounted to year over year contraction of roughly 11%. Revenue generation for the period reported hit the tape at $2.2 billion, also a beat, and also year over year contraction (-4.8%). What qualified for adjustment as far as the firm was concerned? Long-lived asset impairment and restructuring related costs, primarily related to the suspension of the expansion into Canada, as well as employee severance costs. These adjustments by virtue of mathematics impacted operating income by $30.4 million, and net income by $23 million or $0.40 per diluted share. For those actually doing the math, and said... "Hey Sarge, I see a EPS difference of $0.38, you are both receptive and correct. There was also a positive store asset impairment of $0.03, and a negative income tax benefit on that store asset impairment of a penny. Accounting for dummies.
Ever notice that there are folks that are professional traders, investors, strategists, economists and accountants, but to be good at our job, we have to be capable of doing all of their jobs. Just kind of makes me laugh when someone says "That's outside of my field." Well, learn it and get back to me instead of watching "Letterkenny" tonight. Okay, I got off track.
Gross profit margin increased to 35.1% of sales due in large part to reduced promotional activity. The already mentioned net income of $171.5 million measures up understandably poorly versus the $222.7 million reported for the same period one year ago. Comparable sales printed -4.8% from last year, as transactions declined 12.2% fortunately boosted by an 8.3% rise in the size of the average ticket. Guess folks still interested in looking good, bought in bulk. We have seen some of that across retail.
Ulta Beauty had a lot to say about the coming year. First, there are plans to open roughly 40 new stores and either relocate or refurbish 21 more. The firm expects to achieve net revenue of $7.2 billion to $7.3 billion, which is slightly below the $7.32 billion that Wall Street was looking for, while growing comp sales somewhere between 15% to 17%. The firm sees diluted earnings per share for the coming full year of just $8.85 to $9.30, which is a problem as this is nowhere near the consensus view that had been up around $10.60. The firm's numbers assume about $850 million in share repurchases, as well as an effective tax rate of 24.8%.
On the expense side, Ulta sees capital expenditures of $200 million to $250 million and depreciation & amortization expenses of $270 million to $280 million. All in all, the firm's outlook is deeply disappointing.
Now, on the transition in day to day leadership at the firm. Everyone on Wall Street knows who Mary Dillon is. She commands immediate respect. David Kimbell might be great. We just don't know him yet. He joined the firm in 2014 as chief marketing officer and quickly moved up through the ranks, assuming his current title of president in 2019.
As readers can see, these shares had been trading in a range from last April through November, when they broke out of that base. What to watch for right now? The battle around the 50 day SMA of $309. That's the short-term key.
Personally, I think that investors will wait to get behind the stock again until the new CEO can prove himself and he does not even take over until June. This is problematic, or at least introduces risk. While the overnight selloff created a gap that would have to fill upon any coming rally, the breakout last November also created an unfilled gap, and my friends... if that's where this stock is headed, we won't be talking about beauty.
I'm sorry, but I see downside targets. This is not a chip stock where you know the demand is there. Is the demand there? I thought so. I expected positive looking guidance. The firm itself, at least in my opinion, seems downbeat at a time where I expected shining optimism. Remember, nobody ever went to the plate expecting to strike out and did something else.
This stock has now moved to the "Missouri" category. Show me. I will say this, and perhaps it's positive... June $340 calls are trading at $16 and the volume is heavier than you would think. June $280 puts are hardly trading, and are valued about a dollar cheaper than the $340 calls despite the strike price being close to the last sale of the stock. Food for thought.