Why Ulta Beauty's Shares Are Down 10% Despite a Strong Quarter

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What happened

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Wall Street gave investors another case of "when good isn't good enough" this morning as shares of Ulta Beauty (NASDAQ: ULTA) traded roughly 10% lower as of 11:00 a.m. EDT despite the beauty retailer beating profit estimates during the second quarter.

So what

Looking through Ulta's second-quarter results, investors are likely scratching their heads over the 10% sell-off. Net sales jumped more than 20% to $1.29 billion, right in line with analysts' estimates, driven by an impressive 11.7% comparable-store sales increase -- a figure many retailers would love this year even though it's down from Ulta's prior-year 14.4% climb. That strong result filtered down to the bottom line as well, with earnings per share checking in with a 28% boost to $1.83. That result exceeded analysts' estimates calling for an EPS of $1.78. Furthermore, its e-commerce revenue grew by 72% and its selling, general, and administrative (SG&A) expenses as a percentage of net sales declined slightly by 10 basis points. 

"The Ulta Beauty team delivered another quarter of excellent performance with strong top line growth coupled with robust margin expansion," said CEO Mary Dillon in a press release. "We accelerated our market share gains while continuing to reduce promotional intensity and increase personalized offers through our industry leading loyalty program."

Now what

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The reality is that Ulta's share price isn't being sold off due to its second-quarter results -- it likely has more to do with the general consensus that it will face increasing competition in the near term as the beauty market slows. Also, investors may be somewhat wary of Amazon.com's (NASDAQ: AMZN) potential to join and thrive in any industry that can ship products in a box.

Since we know how much Wall Street loathes uncertainty, and because of the near-term uncertainty, Ulta's share price is being punished despite a strong quarter. However, in spite of the 25% drop in Ulta's stock price over the past three months, long-term investors understand that the company's investment thesis is very much intact and has been lucrative.

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Daniel Miller has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon and Ulta Beauty, Inc. The Motley Fool has a disclosure policy.