The selling environment has worsened in key parts of the makeup industry, and that shift has affected Ulta Beauty's (ULTA -0.62%) business. Revenue has grown over the past few quarters, but not at the robust rate that investors had seen as recently as mid-2017. Profitability is on a multiyear downtrend.
Those unfavorable forces continued to pinch Ulta Beauty's business in the second quarter, but the retailer said it remained on track to meet management's 2018 sales and earnings targets.
More on that steady forecast in a moment. First, here's a look at how the headline results compare with the prior-year period:
|
Metric |
Q2 2018 |
Q2 2017 |
Change (YOY) |
|---|---|---|---|
|
Revenue |
$1.49 billion |
$1.29 billion |
15% |
|
Net income |
$148 million |
$114 million |
30% |
|
EPS |
$2.46 |
$1.83 |
34% |
Data source: Ulta Beauty's financial filings. YOY = year over year.
What happened this quarter?
Sales growth met management's targets but continued the downward trend that investors have seen for more than a year. Profit margins dipped, meanwhile, thanks to a mix of competitive moves and increased spending to support the online sales channel.
Image source: Getty Images.
Here are the key highlights of the quarter.
- Comparable-store sales, or sales at existing locations, came in up 6.5%, which was within the target range that management issued back in late May. That represented the fifth straight quarter of slowing growth for the retailer (comps gains peaked at 17% in early 2017).
- Ulta's sales growth was driven by a balanced mix of higher customer traffic and increased spending per visit.
- The e-commerce segment spiked 38% and contributed 2.5 percentage points of overall comps gains.
- Ulta added 19 stores to its selling footprint, which helped overall revenue rise 15%.
- Gross profit dipped slightly, and selling expenses grew at a faster rate than revenue. As a result, operating margin fell to 13% of sales from 14% of sales a year ago.
- Slumping tax liabilities ensured that bottom-line profits jumped by 30%.
What management had to say
Executives said the retailer's valuable brand and flexible operating approach allowed it to grow in a spotty selling environment. "The Ulta Beauty team delivered a strong performance in the second quarter," CEO Mary Dillon said in a press release, "reflecting rapid growth in prestige boutique brands, mass cosmetics, skin care and fragrance, offset by continued moderation in the growth rates of a few of our large color cosmetics brands."
"Our flexible business model," Dillon went on, "continues to support healthy retail comps, excellent new store productivity, and high growth for Ulta.com, resulting in significant market share gains across categories."
Looking forward
Executives issued a short-term outlook that calls for comps to rise by between 7% and 8% in the third quarter, which would mark Ulta's first growth acceleration in over a year. Stepping back, overall sales are still expected to improve by about 7% this year, compared to last year's 11% jump.
Ulta's other key financial targets remained unchanged, including expectations for a second straight annual reduction in operating profit margin as the company works to stay competitive in its core makeup categories while spending to support its e-commerce segment. Management plans to open roughly 100 new locations in 2018, and that aggressive expansion pace appears to be well supported by healthy customer traffic and spending patterns as we approach the holiday selling season.
