ULTA a Clear Winner Over DICK's Sporting Goods: Why?

One of the primary tools for becoming a successful investor is to have a diversified portfolio. A variety of stocks not only minimizes risk, but also gives an investor the chance to enjoy optimum return. Hence, it would be prudent for any investor to exit underperforming stocks and instead, invest in the right stocks at the opportune moment.

This said, investors bearing the brunt of a tough retail landscape, particularly those who have been unlucky with apparel stocks like DICK's Sporting Goods Inc. DKS, should resort to beauty retailers like ULTA Salon, Cosmetics & Fragrance, Inc. ULTA, which managed to transcend the prevalent retail headwinds with a solid fourth-quarter fiscal 2015 performance.

ULTA Salon vs. DICK's Sporting

ULTA Salon is the largest beauty retailer that provides one-stop shopping for prestige, mass and salon products and salon services in the U.S. DICK's Sporting, on the other hand, is a full-line sporting goods retailer in the U.S. offering athletic shoes, apparel, accessories and a broad selection of outdoor and athletic equipment for team sports, fitness, camping, hunting, fishing, tennis, golf, water sports, etc.

ULTA Salon has been a favorite among investors for a while now, given its solid fundamentals, strong earnings history and favorable estimate revisions.

Fundamentals

Taking a look at fundamentals, ULTA smartly combines the mass appeal of drugstore staples with prestige cosmetic brands, creating a unique balance between affordability and luxury. The company's unique product selection seems to be moving its business in the right direction and striking a chord with beauty-conscious consumers.

The company is mainly gaining from product novelty, solid in-store execution, marketing and advertising initiatives. Apart from this, ULTA's customer reward program is one of the most successful in the retail industry, with 18.2 million members who account for a significant part of its revenues.  

Coming to DICK's Sporting, though the company has been aggressively expanding its store base and eCommerce capabilities, and is focused on tapping every possible avenue to generate greater sales, its business is highly seasonal in nature. Unlike ULTA Salon, DICK's Sporting typically generates stronger sales during the fourth quarter, which is characterized by the holiday and winter sports selling seasons. Consequently, failure to deliver expected operating performance exposes DICK's Sporting to significant risks.

Unfortunately, this was exactly the case witnessed in fourth-quarter fiscal 2015 where the prevalence of unseasonably warm weather weighed on the sales of cold weather- related products. These categories, which include jackets, fleece, cold weather compression, boots and accessories, forming a considerable part of the fourth-quarter business, were down by double digits owing to seasonality.

Also, the company faces intense competition from other sporting goods retailers on grounds of size, availability of financial, distribution and marketing resources, pricing strategies and retail sales methods. In fact, stiff competition and intense promotional activity also remained headwinds in the holiday season, in turn impacting the company's results.

Talking of results, let's take a closer look.

Q4 Results & Surprise History

Starting with DICK's Sporting, the company ended fiscal 2015 on a dismal note as both the top and bottom lines lagged the Zacks Consensus Estimate in the fourth quarter. Also, earnings plunged year over year with comparable store sales (comps) declining 2.5%. Apart from this, high promotional activities, increased markdowns, and greater occupancy and shipping costs led to soft gross and operating margins in the quarter.

Taking a look at DICK's Sporting's surprise history, we note that the company's earnings have underperformed the Zacks Consensus Estimate by an average of 0.3% over the past four quarters, with an earnings beat in only one quarter. On the sales front, the company has been delivering negative sales surprises for the past three quarters, with an average of 1.2%.

On the contrary, ULTA Salon posted spectacular fourth-quarter fiscal 2015 results, wherein both the top and bottom lines crushed the Zacks Consensus Estimate and surged year over year. Moreover, comps grew 12.5%, driven by a rise in transactions and average ticket. The upbeat results also encouraged management to provide a robust first-quarter fiscal 2016 view.

A sneak peak at this beauty retailer's history gives us a splendid picture as the company delivered positive sales and earnings surprises of an average of 2.4% and 7.6%, respectively, over the past nine quarters.

Comparing their long-term growth rates, ULTA Salon stands to have a long-term earnings growth rate of 19.6%, comparing favorably with the industry average of 16.7%. Conversely, DICK's Sporting's long-term earnings growth rate is currently pegged at 12.4%, way below the industry average.

Further, let's see how these companies are placed with regard to earnings estimate revisions as this gives a clear indication of analysts' sentiment on a company's future performance.

Following ULTA Salon's fourth-quarter fiscal 2015 earnings release, the Zacks Consensus Estimate for fiscal 2016 and fiscal 2017 has moved up 4% and 4.9% to $5.91 and $7.13, respectively, over the past 30 days. On the contrary, the Zacks Consensus Estimate for fiscal 2016 and fiscal 2017 has trended downward for DICK's Sporting, declining 8.9% to $2.97 and 4.4% to $3.49, respectively, over the same time frame.

On the financial front as well, ULTA Salon emerges a clear winner.

So Let's Say It Aloud

ULTA Salon is set to continue with its solid trends in fiscal 2016 as well. While most retailers had ended in the red last year, ULTA Salon rallied a meaningful 45.9%. On the other hand, shares of DICK's Sporting lost over 28% in 2015.

Finally coming to Zacks Rank, ULTA Salon currently sports a Zacks Rank #1 (Strong Buy) whereas DICK's Sporting is a clear let-down with a Zacks Rank #5 (Strong Sell), which pronounces the message loud and clear.

Investors can also count on stocks like Barnes & Noble, Inc. BKS and KAR Auction Services, Inc. KAR, both of which carry the same Zacks Rank as ULTA Salon.

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