If you want evidence that the theme of 2017’s market action is fear, look no further than Ulta Beauty (Nasdaq: ULTA).
The beauty retailer, whose business has exploded on the back of its services-laden model and well-regarded customer care, is off by more than 4 percent during a year in which it has posted two excellent earnings reports. The culprit holding Ulta stock back? Worries about everyone’s favorite retail boogeyman, Amazon.com ( AMZN), lurking under Ulta’s bed. Worries stemming from department stores’ results. Worries from beauty giant L’Oreal.
Wall Street over the past few months has turned into a flinch-fest, with rapid bouts of selling triggered by the moment someone casts doubt upon companies in the retail space. Even the past few weeks have seen encouraging second-quarter reports met with skepticism and deeper retreats.
Ulta’s best hope of reversing a nasty two-month slide of more than 20 percent is its second-quarter earnings report, out after Thursday’s closing bell. But is the market so jaded that even this best-in-breed retailer can’t drown out the bears?
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Here’s a look at what’s in store for Ulta stock, as well as other notable earnings reports on the docket this week.
The headline numbers. The analyst community’s estimates for Ulta’s second-quarter more or less mimic the trajectory expected for the full fiscal year. Wall Street is looking for 20.2 percent revenue growth to $1.28 billion on 24.5 percent profit growth to $1.78 per share. That’s roughly in line with full-year estimates for expansion of 20.8 percent on the top line and 27.6 percent on the bottom line.
Q2’s estimates do, however, anticipate a little slower growth than the past two quarters, in which Ulta’s revenue improved by 22.5 percent and 24.6 percent. It’s also pacing slower than Ulta’s roughly 24 percent top-line growth between fiscal 2015 and 2016.
But what really has shaken Wall Street over the past couple of months is the possibility that Ulta could decelerate far more than that.
Fear factors. Ulta stock peaked on June 5, just a couple of weeks after the company clobbered first-quarter earnings and revenue expectations. Shares had advanced by more than 23 percent to roughly triple the market at that point, and were starting to look overcooked, trading at 44 times trailing earnings and 30 times forward estimates.
Guggenheim acknowledged as much on June 13 when it initiated Ulta shares at “neutral” on June 13. While analyst Steven Forbes heaped praise upon the company’s wide, service-assisted moat, he warned that Ulta’s lofty valuation put a cap on upside.
In other words, a little bit of profit-taking in early June was understandable. But that quickly began to snowball under the weight of a few more negative headlines.
Ulta stock joined much of the rest of the retail sector in swooning June 16, when Amazon announced the purchase of Whole Foods Market ( WFM). While the acquisition clearly was a shot on the likes of Wal-Mart Stores ( WMT) and Costco Wholesale Corp. ( COST), broader retail still responded with fear to Amazon’s sudden burst of aggression — even Ulta, which seemingly has little to fear given how different its model is.
Goldman Sachs swatted at those fears, in fact, upgrading Ulta to “buy” July 14, saying the retailer had little to fear from price competition, and that it doesn’t believe Amazon “offers a compelling alternative.”
Oppenheimer brought a new fear to the table July 31, looking past Amazon and instead toward department stores and ramped-up discounting, presenting a near-term threat to its operational upside. That came on the heels of L’Oreal’s second-quarter earnings report and conference call, where management bemoaned a difficult U.S. market.
Rally time? In a normal market, it would be hard not to love Ulta’s current setup.
Mere whispers of trouble have prompted Ulta stock in just two months to bleed out all of 2017’s results-driven gains, and then some. This has come despite a loud chorus of analysts asking investors to consider the bigger picture. Cowen shrugged off reports of Amazon’s partnership with online luxury beauty retailer Violet Grey, citing Ulta’s “loyalty, prestigious brand access, and mass offerings.” Even Guggenheim, in its neutral note, also expressed confidence that Ulta will claw more share away from department stores and drugstores.
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A beat Thursday should spark a violent rally in Ulta stock, especially given the potential for a short squeeze given short interest of nearly 2.7 million shares — its highest reading in the past 52 weeks. But this isn’t a normal market for retail stocks, and performance isn’t being rewarded with buying.
The best tactic for now? Consider long call options strategies ahead of Thursday’s report. That will allow you to bet on Ulta stock’s considerable upside potential while limiting the downside risk presented by easily spooked retail-sector investors.
More Earnings in Focus
Lowe’s Cos. (LOW). Lowe’s seems set up to fail given rival Home Depot’s ( HD) earnings report last week. Despite Street-beating revenue, earnings and comparable-store sales growth, as well as hiked full-year guidance, investors sold off HD shares in what appeared to be a continuance of the broad-based Amazon fear trade.
Lowe’s, which hasn’t been nearly as skilled as Home Depot at managing profit expectations — delivering five earnings misses in the past nine quarters — offers up its Q2 results before Wednesday’s opening bell. Analysts expect revenue to climb 7 percent year-over-year to $19.53 billion, with a 17.5 percent jump in profits to $1.61 per share.
Tiffany & Co. (TIF). Tiffany is one of a few retailers that has held up well in 2017, with the luxury accessories brand up 13 percent year-to-date, edging out the broader market. But will TIF merely be the next retailer to collapse? Goldman Sachs in May glowed over Tiffany shares, saying it “offers unique exposure to a resurgence in luxury, driven by improved international tourist spending and a firming high-end U.S. consumer.” But has that thesis played out, and will it be enough to counter what Needham’s Rick Patel says is a risk of European underperformance? We’ll find out Thursday morning, when TIF is expected to report flat revenue of $931.74 million and a 3.6 percent uptick in profits to 87 cents per share.
This Week’s Earnings Calendar:
Monday. BHP Billiton ( BHP), Ruby Tuesday ( RT).
Tuesday. Coty ( COTY), Cree ( CREE), Intuit ( INTU), La-Z-Boy ( LZB), Salesforce.com ( CRM), Toll Brothers ( TOL).
Wednesday. American Eagle Outfitters ( AEO), Express ( EXPR), HP ( HPQ), PVH Corp. ( PVH), Royal Bank of Canada ( RY), Williams-Sonoma ( WSM).
Thursday. Abercrombie & Fitch Co. ( ANF), Dollar Tree ( DLTR), GameStop Corp. ( GME), Hormel Foods Corp. ( HRL), J.M. Smucker Co. ( SJM), Seadrill ( SDRL), Staples ( SPLS), VMware ( VMW).
[See: 8 Ways to Satisfy a Craving for Restaurant Stocks.]
Friday. Big Lots ( BIG).
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Ulta Beauty Inc (ULTA) Stock Should Finally Strike Back originally appeared on usnews.com
