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IAS Highlights Dollar General,
Lululemon Ulta Beauty and Disney

Doug Gerlach, editor, Investor Advisory Service (IAS), reports on Q3 results for Dollar General, Lululemon, Ulta Beauty and Disney’s well-received Investor Day. For the eleventh consecutive year, Investor Advisory Service appears on the Hulbert Investment Newsletter Honor Roll for 2020-2021.

Disney Focused on Streaming

Walt Disney Co. (NYSE: DIS) shares surged 13% following the company’s well-received investor day that focused on streaming. The company highlighted more than 100 new original television series and films coming to Disney+ over the next few years, including a range of offerings across Marvel, Star Wars, Pixar, and Disney.

The company also refreshed its guidance for 2024 subscriber targets. It now expects between 230-260 million Disney+ subscribers by fiscal 2024 versus 87 million subscribers today. By comparison, Netflix currently has approximately 200 million subscribers. The updated guidance was well ahead of investor expectations. Across Disney+, Hulu, and ESPN+, the company expects to have 300-350 million subscribers by 2024.

Of course, the additional content comes with additional cost. Management declined to provide specifics but indicated streaming peak losses would occur in 2021. It expects to achieve profitability across its streaming services in 2024, when the annual content budget will be between $8-$9 billion for Disney+ versus roughly $2 billion in the current year. Given the increase in content costs, Disney announced a one dollar increase in monthly price for the Disney+ service to approximately $8 per month that will be implemented beginning in March.

DIS (174.00) is a buy up to 33.

Dollar General Reported Strong Q3 Results

Dollar General (NYSE: DG) reported strong Q3 results. Sales grew 17% while same-store sales advanced more than 12%. Same store sales growth was driven by an increase in average transaction amount partially offset by a decline in traffic as customers consolidated trips. Same-store sales peaked in August and moderated through the quarter.

Management highlighted continued market share gains as it has welcomed new customers it is working hard to retain. Gross margin benefitted from offerings like DG Fresh and NCI, the company’s non-consumables initiative. Lower markdowns also helped margins, partly offset by higher distribution and transportation costs. Despite incremental costs associated with COVID-19, operating income grew 57% and EPS increased 63% to $2.31 for the third quarter of 2020.

The strong performance has continued into Q4, as same-store sales through the first month of the quarter were up approximately 14%. Due to uncertainty related to the virus, management did not issue sales or EPS guidance though it highlighted anticipated margin pressure from transportation costs and investment in distribution centers.

Management also provided an update of its newest store format, pOpshelf. The new concept features continually-refreshed, mostly non-consumable product categories, primarily priced at $5 or less. The concept is tailored to a different shopping occasion than Dollar General and targets a more affluent customer in suburban communities. Dollar General has opened two pOpshelf stores to date with early results ahead of expectations. The company plans to have approximately 30 pOpshelf stores open by the end of 2021.

Fiscal Year 2021 Store Growth Outlook

For the 52-week fiscal year ending January 28, 2022 (“fiscal year 2021”), the Company plans to execute 2,900 real estate projects, including 1,050 new store openings, 1,750 remodels, and 100 store relocations.

“We are excited to once again accelerate our real estate growth plans in fiscal year 2021,” said Jeff Owen, Dollar General’s chief operating officer. “Our portfolio of high-return real estate projects continues to be a top priority for capital allocation as we look to continue delivering long-term shareholder value. With a robust pipeline in place and plans to execute an average of nearly eight real estate projects per day in fiscal year 2021, we are enthusiastic about the opportunity to further expand our footprint and serve even more customers across the country.”

DG (207.80) is a buy up to 127.

Lululemon Reports Strong Q3 Results, Expresses Caution regarding Q4

Lululemon (Nasdaq: LULU) reported strong Q3 results but expressed some caution regarding Q4 given the recent resurgence in the virus causing restrictions on its physical stores. Revenue in Q3 grew 22%, with 19% growth in North America and 45% internationally. The company remains committed to quadrupling its international revenue from 2018 levels by 2023.

Overall comparable store sales grew 19% driven by an increase in online sales. Comparable sales for physical stores were down 17% while e-commerce increased 94%. Ecommerce represented 43% of overall sales versus 27% a year ago. Lululemon’s shift over the past several years to focus on the omnichannel customer experience has positioned the company well to manage the current environment. Margins were held back by additional marketing associated with Mirror, which the company acquired in June with the goal of tapping into the at home interactive fitness trend. GAAP EPS of $1.10 represented an increase of nearly 15%.

The company’s outlook for Q4 was colored by the increase in COVID-19 cases leading to further capacity restrictions in its stores. Overall sales are expected to be up mid- to high-teens, above prior guidance for a high-single to low-double digit increase. Comparable store sales for physical locations are expected to be down 30%, reflecting capacity constraints. E-commerce should continue to be strong but decelerate versus Q3. Adjusted EPS growth in Q4 is anticipated to be in the mid-single digit range, an increase from prior guidance for a modest decline.

Lululemon remains on track to open 30-35 stores this year with 24 stores opened through Q3. This represents a double-digit increase in square footage.

LULU (356.07) is a buy up to 191.

Ulta Beauty Reported Mixed Q3 Results

Ulta Beauty (Nasdaq: ULTA) reported mixed Q3 results. Sales declined 8% while comparable sales fell 9%, as a greater than 7% increase in ticket size was offset by a meaningful reduction in traffic. The growth of e-commerce sales slowed to 90% from more than 200% last quarter as stores reopened.

Ulta continues to experience strength in its skincare, bath and fragrance, and haircare categories, while makeup continues to be challenged due to shifts in customer behavior during the pandemic.

By quarter end salon services were available in nearly all locations but were down 30% versus a year ago, hurt by capacity restrictions. Lower promotional activity helped margins but could not overcome the softer topline and incremental COVID-related expenses. In the quarter the company took an impairment charge largely related to a decision to suspend its expansion to Canada to prioritize its efforts in the U.S. Adjusting for the impairment charge, EPS of $1.64 represented a decline of 26%.

As part of its increased focus on the U.S., the company recently announced an agreement with Target for a store-in-store concept in select Target locations and online beginning next fall. Ulta is looking to benefit from the traffic in Target stores and hopes to reach new customers.

The company declined to provide full guidance given the uncertain environment but expects Q4 comparable sales to decline between 12%-14%, modestly better than the expectations it previously outlined.

Management also reiterated its confidence that operating margins will return to double-digits over the longer term but highlighted the difficulty of pinpointing when that will happen.

ULTA (267.55) is a buy up to 242.

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