Cosmetics retailing has become a more challenging place to do business lately. Investors don't have to look hard to find evidence of that shift impacting Ulta Beauty (ULTA -2.13%), either. Its last few earnings reports have been marked by slowing sales growth and reduced profitability, after all.
Both of those trends could be about to change, though, as the spa and beauty products retailer is expected to have positive operating news for shareholders in third-quarter results due on Thursday, Dec. 6.
Let's take a closer look.
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Accelerating again
In its last report in late August, the company revealed that growth had slowed for the fifth consecutive quarter as comparable-store sales gains clocked in at 6.5%. The good news is that the metric met management's forecast and consisted of healthy customer traffic trends along with a 38% spike in the e-commerce division. Ulta also gained market share in a tough selling environment for prestige cosmetics.
Things should look even better for the current quarter. CEO Mary Dillon and her team predicted that comps gains would land between 7% and 8% this time, which would mark the retailer's first growth acceleration since comps peaked at 17% in late 2016. Beyond that uptick, investors will be looking for signs that the gains were driven by strong customer traffic in its stores and healthy conversion rates for online shoppers.
Stabilizing profits
Ulta Beauty faced several spending challenges last quarter that together pushed profitability significantly lower. A few of these were temporary, including price cuts aimed at clearing inventory ahead of the holiday season and the opening of a new distribution center in California. Some, like store remodeling and the shifting of resources toward its online infrastructure, will likely persist over at least the next few quarters and pressure margins along the way.
Operating margin is the best single metric to watch for clues about how well Ulta is managing all of these competitive and strategic challenges. The figure worsened to 13.3% of sales over the last six-month period, from 14.2% a year earlier. Executives predicted that trends will improve in the second half of 2018, though, and so investors will be looking for better results here on Thursday.
The long-term outlook
More of Ulta Beauty's growth is coming from the online segment than management had expected just a year ago, and that shift has negative implications for its short-term profitability. However, the company still sees room for an eventual 1,400 to 1,700 physical store locations in the U.S., up from 1,100 today. Its expansion pace has held steady at about 100 launches per year, and the retailer aimed to have most of those stores up and running ahead of the crucial holiday shopping period we've just entered.
For the more immediate outlook, watch for Dillion and her team to update the 2018 forecast that, as of late August, predicted comps gains between 6% and 8%, operating margin to drop by less than 1 percentage point, and a 40% increase in e-commerce sales. Each of these targets could shift to incorporate the latest demand trends that management is seeing. And, given the stock's over-20% price increase in the three months leading up to this release, it's clear that investors are hoping for a modest upgrade, or at least an affirmation, of that outlook.
