Ulta Beauty (NASDAQ:ULTA) reported holiday-quarter results this week that met management's sales growth targets but came up short with respect to profitability. The retailer also forecast pricing challenges in the year ahead as the industry grapples with slower growth and increased competition.

More on that 2018 outlook in a moment. But first, here's a look at how the big-picture results stacked up against the prior-year period:

 Metric

Q4 2017

Q4 2016

Year-Over-Year Change

Revenue

$1.94 billion

$1.59 billion

23%

Net income

$208 million

$140 million

49%

Earnings per share

$3.40

$2.24

52%

Data source: Ulta Beauty financial filings.

What happened this quarter?

Sales growth came in right within the range that management issued back in December. However, the results showed signs that the retailer is losing earnings power amid the broader industry slowdown.

A woman applies makeup in the mirror.

Image source: Getty Images.

Here are the key highlights of the quarter:

  • Comparable-store sales growth slowed for the third straight quarter, with comps improving by 9% compared to 10% in the third quarter and 12% in Q2. The increase was driven by a 6% boost in customer traffic and a 3% uptick in average spending per customer.
  • E-commerce sales shot up by 60% and continued their trend of accounting for an increasing proportion of overall growth. The digital sales channel was responsible for 4.6 percentage points of Ulta's overall comps gains over the holidays, compared to 3.7 percentage points in the prior quarter.
  • Gross profit margin dipped to 34% of sales from 34.5%.
  • Expenses rose faster than sales, with about half of the increase tied to one-time bonuses that the company issued to its employees. The extra costs led operating margin to shrink to 13.1% of sales from 14.2% in the year-ago period.
  • Ulta's bottom line expanded despite the reduced profitability thanks to lower tax expenses and an extra sales week during the period.

What management had to say

Management noted that the core makeup segment slowed dramatically during the period, but that the slump didn't get in the way of solid growth for the year. "The Ulta Beauty team delivered excellent results in 2017," CEO Mary Dillon said in a press release, "achieving 11% comparable sales growth and 25% adjusted earnings growth."

"We also achieved strong sales and earnings growth in Q4 while continuing to gain market share and make significant progress on our strategic imperatives," Dillon explained, "despite continued moderation in the growth rate of makeup, our largest category."

Looking forward

Executives predict that comps will rise between 6% and 8% in 2018 to mark a slowdown from last year's 11% boost. That growth will be supplemented by 100 new store openings so that overall sales will rise in the low teens percentage range, they said. Ulta made no change to its long-term target of reaching a 1,700 store base over time, up from roughly 1,100 today.

Meanwhile, increasing cost pressures and a faster shift toward e-commerce sales will likely push operating margin lower this year, down to about 13% of sales. Dillon and her team had been hoping to push that figure up toward 15%, but challenging industry conditions did away with that goal.

Rather than target a specific profitability figure going forward, Ulta executives said investors should focus on broader earnings growth, with is still expected to pass 20% this year thanks in part to sharply lower income tax expenses.

Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool recommends Ulta Beauty. The Motley Fool has a disclosure policy.