The healthiest retailers today are the ones that can pair a compelling shopping experience in their stores with expanding e-commerce capabilities. In earnings results announced last week, Ulta Beauty (NASDAQ:ULTA) showed off its strength in both of these important areas, which allowed the beauty product specialist to affirm its 2018 outlook after sales and profits edged past management's targets.
To put those first-quarter results into perspective, CEO Mary Dillon and her team held a conference call with Wall Street analysts. Below are a few highlights from that discussion.
The model is working
2018 is off to a strong start, with better-than-expected sales and earnings growth reflecting our highly differentiated business model that continues to drive healthy retail same-store sales.
Ulta Beauty grew sales at existing locations by 8.1%, and while that marked its fourth straight quarter of slowing growth, it still represented healthy gains. The revenue boost followed a prior year that saw a 14% comparable-store sales (comps) increase, after all. This year, sales growth was balanced between a 5% increase in customer traffic and 3% higher pricing, and both metrics imply solid demand for Ulta Beauty's products and spa services.
Shifting toward digital sales
Our [advertising] spend is shifting more into digital, streaming audio, and streaming television, to align with the beauty enthusiasts' digital-first lifestyle.
Management noticed that its customers are spending more time online these days and it is adjusting its marketing plans to account for that move. The initiative is working, as e-commerce sales spiked higher by 48% this quarter thanks to a 38% increase in traffic combined with higher spending.
The digital sales channel contributed 3.4 percentage points, or just under half of the overall comps gain. The importance of that channel should grow as the year progresses, given that executives believe the business will grow by about 40% in 2018 while climbing toward 15% of the broader business.
Steady profit margin
Retail[ing profit] margin rate was roughly flat year over year as we ran one postcard offer this quarter, compared to two smaller events last year, and we ran a clearance event at the end of the quarter to exit with very clean inventories.
-- CFO Scott Settersten
Parts of the industry, especially the core makeup niche, remain challenged with slowing growth and increased pricing pressure by competitors. Despite those headwinds, Ulta Beauty held the line on its promotions and kept its product margins intact.
Overall operating profitability did decline, with margin slipping to 13.6% of sales from 14.3% a year ago. However, management said that result was a bit better than expected and was driven by investments into growth initiatives like the digital sales channel.
New stores are healthy
New story productivity continues to be very healthy, reflecting excellent site selection, as well as the more significant presence of prestige brand boutiques in newer stores.
Executives are happy with the performance of their newest locations, and they're having no trouble finding good real estate to develop. Ulta Beauty added 34 stores to its footprint this quarter to cross 1,000. Management still believes they'll launch about 100 new locations in 2018, and its long-term target forecasts keeping that pace until reaching between 1,400 and 1,700 total stores across the country.
For the second quarter of 2018, we expect sales to be in the range of $1.475 billion, to $1.488 billion, versus $1.29 billion last year.
Ulta Beauty forecast another modest growth slowdown ahead, with fiscal second-quarter comps stopping at between 6% and 7%. That result will again benefit disproportionately from digital sales, which are expected to jump 40%.
For the full year, comps should still rise by between 6% and 8% to mark a slight decrease from last year's 11% spike. Ulta Beauty's profit outlook, meanwhile, remains strong, with earnings on pace to rise by over 20% even as operating margin slips due to costly -- but likely temporary -- investments in the digital selling channel.