Ulta Salon, Cosmetics & Fragrance Inc. (ULTA) posted its second-quarter 2010 adjusted earnings of 25 cents per share, which were well ahead of the Zacks Consensus Estimate of 19 cents. Including one-time compensation charges, Ulta Salon recorded a quarterly net income of $13.1 million or 22 cents per share, well above $5.8 million or 10 cents recorded in the year-earlier quarter.
Total revenue in the quarter under review surged 17.6% year over year to $321.8 million. The increase was driven by a rise in comparable store sales, which jumped 10.8% from a decrease of 1.7% in the prior-year quarter, aided by an 8.0% increase in customer count as well as a 2.8% increase in average ticket. Management said the enhancement was balanced across all major categories and credited this marked improvement in results amid a sluggish economic recovery, to market share strategies implemented in 2009, dynamic marketing and compelling brands.
Inside the Headline Numbers
Gross margin expanded 350 basis points (bps) year over year to 32.3%, mainly on account of cost reductions derived from improved supply chain and leverage in marketing.
Selling, general and administrative expenses as a percentage of sales inched down 50 bps to 24.8%. Accordingly, operating income more than doubled year over year to $22.3 million, while operating margin grew 320 bps to 6.9%.
Financial Position
Ulta ended the quarter with cash and cash equivalents of $15.9 million, deferred rent of $120.3 million and deferred income taxes of $21.0 million.
Merchandise inventories at the end of the quarter stood at $224.3 million, compared with $209.2 million at the end of the previous quarter. The increase was mainly due to an addition of 23 net new stores. However, average inventory per store remained flat year over year due to better inventory management initiatives.
The company generated $40.1 million of cash from operations during the quarter and deployed $32.6 million toward capital expenditure, which resulted in free cash flow of $7.5 million.
Store Update
In the quarter under review, Ulta opened 10 stores bringing the total number of stores to 356. For the third quarter, Ulta is set to open 28 new stores. The company is targeting to open approximately 46 new stores, remodel 13 stores and relocate 6 stores by year-end 2010.
CEO Replacement
At the end of the second quarter, the company completed the CEO transition with Chuck who replaced Lyn Kirby.
Optimistic Outlook
Ulta expects its earnings growth to expand further in the fiscal third quarter. The company expects its adjusted earnings per share to remain between 20 cents and 22 cents, a significant growth from 14 cents recorded in the year-earlier quarter, helped by Ulta’s sound marketing, merchandising and stores expansion strategies.
Net sales are anticipated between $324 million and $330 million on a comparable-store sales rise of 7% to 9%. Projected net sales will register a year-over-year growth of 14.1% to 16.2%. Management also remained optimistic about driving traffic along with average ticket growth riding on leverage in the loyalty program, value offerings and introduction of new brands like Tarte in cosmetics.
Meanwhile, one of Ulta’s competitors, Regis Corp. (RGS) reported its fiscal fourth-quarter 2010 net earnings of 30 cents per share missing the Zacks Consensus Estimate of 37 cents.

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