In an environment where comparable sales gains of 5 percent are considered robust, one under-the-radar beauty retailer blew the competition out of the water.
Ulta Salon, a specialty beauty shop that is aggressively expanding its store count across the U.S., reported a 12.5 percent same-store sales lift during the fourth quarter, topping expectations. Even more impressive is that the boost lapped a strong prior-year holiday period, when the retailer logged an 11.1 percent boost.
According to Retail Metrics data, only Kate Spade, which reported a 14 percent increase in comparable sales, outperformed Ulta. The beauty store's shares jumped 17 percent Friday, topping $191, in response.
"Amidst a challenging retail backdrop and fears of a potential [comparable-sales] slowdown, Ulta delivered an impressive fourth-quarter performance, beating topline and margin expectations, raising 2016 guidance, and accelerating share buybacks," Evercore ISI analyst Omar Saad told investors.
Several factors contributed to Ulta's robust performance. For one, its gross margins got a lift from the company's shift from widespread use of coupons to more targeted offers. For another, the retailer managed to boost traffic — a particular feat given the industrywide dropoff.
And Ulta's net revenues, which increased 21 percent to reach $1.27 billion, were helped by the addition of roughly 100 new stores last year. Ulta plans to open another 100 shops this year, which would put it just shy of 1,000 locations. The company has targeted a longterm network of 1,200 stores, though it's now re-evaluating goals.
"We believe there could be upside to their current 1,200 store base target, given the success they've had in small markets and the opportunity for downtown/urban locations," Cowen and Company analyst Oliver Chen said.
Competition in the beauty space has become increasingly fierce, with several major department stores setting their sights on the category. Kohl's, for instance, recently revamped its beauty offering, and J.C. Penney is expanding its partnership with LVMH-owned Sephora. Beauty is an attractive category for retailers, as shoppers tend to make frequent visits when they run out of a certain product, thereby driving repeat sales.
Ulta expects 2016 to be another strong year, and has guided for earnings per share to grow 18 to 20 percent. Still, Jefferies analyst Randal Konik maintained his "hold" rating on the retailer. The analyst cited limited earnings upside due to Ulta's ongoing investments and "pricey" valuation, though he lifted his price target to $180 from $165.
"We remain hold rated due to what we view as a full valuation but look for a more attractive entry point," he said.
Ulta shares are up 35 percent over the past year.
Correction: This story has been updated to reflect Ulta's proper stock movement.