Please ensure Javascript is enabled for purposes of website accessibility

Ulta Beauty Takes a More Measured Approach to Its Retail Expansion

By Demitri Kalogeropoulos - Dec 7, 2018 at 11:18AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The retailer is slowing its pace of new store openings, but still sees plenty of room to reach its long-term targets.

Investors were optimistic heading into Ulta Beauty's (ULTA 3.69%) third-quarter report, which they expected to include accelerating sales gains for the first time in over a year. The beauty products and spa services retailer didn't disappoint in that key metric, but rising expenses and a conservative store growth outlook took some of the shine off of an otherwise strong report.

Here's a big-picture look at Ulta's headline operating results:

 Metric

Q3 2018

Q3 2017

Year-Over-Year Change

Revenue

$1.56 billion

$1.34 billion

16%

Net income

$131 million

$105 million

25%

EPS

$2.18

$1.70

28%

Data source: Ulta Beauty.

What happened this quarter?

Sales growth finally ticked higher after decelerating for five straight quarters. The growth reflected healthy gains in store traffic and in the digital sales channel. Spending spiked, though, sending EPS growth lower than in the previous quarter.

A customer buys hair products.

Image source: Getty Images.

Here are key highlights of the quarter.

  • Comparable-store sales landed at 7.8%, or near the top end of the guidance range that CEO Mary Dillon and her team issued in late August. That result marked an acceleration from the prior quarter's 6.5% boost.
  • About half of the sales growth came from the digital sales channel, with e-commerce sales spiking 43%. Ulta also enjoyed a 5% jump in customer traffic and a 2.5% increase in average spending per visit.
  • Gross profit margin held steady, suggesting firmer pricing trends.
  • Selling expenses jumped as Ulta spent more cash on labor, marketing, and the online selling channel. As a result, operating profit margin fell to 10.8% of sales from 12.1% a year earlier.
  • The company added 42 stores to its base and has launched 95 locations since the start of the year to essentially meet its fiscal-year target of about 100 new shops. Ulta Beauty operates nearly 1,200 stores.
  • Net income rose at a faster rate than operating margin thanks to a far lower tax expense.

What management had to say

Executives said the latest results demonstrate the strength of the retailer's brand and its multichannel selling approach. "Ulta Beauty's strong performance," Dillon said in a press release, "reflects continued market share gains across all major categories, acceleration in our overall comp driven by healthy traffic, excellent new store productivity, and robust e-commerce growth."

Executives went into more detail about these wins in a conference call with investors, noting in particular the attractive economics of the latest crop of stores. "New stores continue to deliver sales ahead of our expectations," Dillon said.

Looking forward

Despite that success, Ulta Beauty says it is planning to scale back on its store expansion efforts over the next few years by opening 80 locations in 2019 and 75 in the following year, compared to about 100 in each of the last two years. Executives say they still see room for as many as 1,700 stores in the U.S. -- up from about 1,200 today. They want to be more deliberate about launches going forward, though, in an effort to strengthen the broader portfolio.

In the meantime, Ulta affirmed all of its key outlook metrics for the full 2018 year and still expects to boost sales by between 7% and 8% as operating margin falls by less than 1 percentage point. The digital sales channel should lead the way higher for the retailer, with gains approaching 40%.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Ulta Beauty, Inc. Stock Quote
Ulta Beauty, Inc.
ULTA
$410.54 (3.69%) $14.63

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
336%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/25/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.