By the magnitude of the market's reaction to this ULTA print, the Street was much more impressed with the headline beat than we were. Based on its history of guiding so conservatively, we actually expected ULTA to put up something closer to up slightly vs last year -- still pathetic -- but that's what we expected. Instead earnings came in at 5.07, DOWN 5% from 5.32 last year. Comps decelerated to 4.5% from 8% last qtr, and we saw further margin pressure across the board -- most notably with Gross Margins down 130bp vs ly (was -110bp in 2Q), as merchandising margins weakened due to increased promotions and lapping price increases from last year (something it cannot do again). Although transactions were up in the quarter, average ticket was down due to units per transaction being down. The company guided to continued GM and operating margin deleverage into Q4. Ending the year with GM down and operating margins flat to last year. We don't get how the company -- in this consumer environment with every line of the P&L going the wrong way amidst new competitive pressures -- can ramp from negative 5% earnings growth in 3Q to its guided 10%+ EPS growth rate guide in 4Q. Could this company have just set itself up for its second miss since the pandemic? The story is slowing here, the company is not putting up the same growth it once did and it is feeling self-induced margin pressure as it fights for market share. On the call the company even said, “our goal and our long-term history is to gain share and our entire strategy across our assortment, our marketing, the loyalty program, our stores, our e-com, our digital tools, everything we do is designed to be a leader and to gain share and to drive our business forward”. This company will fight for marketshare even at the cost of margins. Which we expect to be the case in the upcoming quarters and years. We think that ULTA just set itself up for a potential miss in 4Q as the P&L continues to degrade, and we think earnings expectations in the outer years are too high -- as this company will give up margin to fight for share in an increasingly competitive and mean-reverting landscape.
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