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Ulta Beauty Report Q1 Results

Ingrid Hendershot, CEO, Hendershot Investments Inc., an investment management firm, reviews Q1 results for Ulta Beauty, a portfolio holding.

Beauty retailer, Ulta Beauty (ULTA) reported fiscal first quarter sales of $1.2 billion, down 33% from last year, and a net loss of $78.5 million, or $1.39 per share, compared with net income of $192 million, or $3.26 per share reported last year.

Comparable sales (sales for stores open at least 14 months, including stores temporarily closed due to COVID-19, and e-commerce sales) decreased 35.3%, compared to an increase of 7% in the first quarter of fiscal 2019. The 35.3% comparable sales decrease was driven by a decline of 38.6% in transactions which was partially offset by a 3.3% increase in average ticket. Results include Impairment charges of $19.5 million related to tangible long-lived assets and operating lease assets associated with about 20 retail stores.

Fiscal 2020 started off well, with good growth in comparable store sales, market share, and the Ultamate Rewards loyalty program through mid-March. However, the rapid escalation of COVID-19 resulted in significant disruption to Ulta Beauty’s operations. From March 11 through May 2, same store sales plummeted 62% on the heels of management’s decision to close all stores.

For much of the first quarter, Ulta Beauty operated as a digital-only business, and while e-commerce sales exceeded expectations, it was not enough to fully offset the impact of store closings. With safety continuing to guide management’s decisions, Ulta has begun to reopen stores, and today more than 800 stores offer curbside pickup and more than 330 stores are open to guests. While it is still early, sales have been stronger-than-expected in reopened stores, boosted by pent up demand for salon services.

During the quarter, management took multiple steps to reinforce the company’s financial strength and preserve liquidity including: drawing down $800 million under its $1 billion revolving credit facility; suspending new hires, deferring merit increases for all corporate, store, and salon associates; reducing marketing, travel and other discretionary expenses; moderating the pace of investment to support international capabilities; reducing planned new store openings, relocations and remodel projects; and suspending its stock repurchase program.

Given all the uncertainty, management withdrew its 2020 guidance. During the quarter, free cash flow was a negative versus nearly $200 million last year. The company ended the quarter with $1.2 billion in cash, $1.7 in capital lease obligations and $800 million in long-term debt. Given its strong, differentiated operating model, strong brand and solid financial position, management is confident Ulta Beauty will emerge from this crisis well-positioned to accelerate market share gains and extend its competitive advantages.

Hendershot Investments maintains a “Buy” rating.

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