Ulta Beauty Cashes In on Stronger Holiday-Season Inventory

Ulta Beauty (ULTA 0.01%) saved its best 2018 performance for last. The spa and beauty products retailer on Thursday reported holiday-season earnings results that paired accelerating sales gains with stabilizing profitability as merchandising initiatives resonated with customers both in stores and online.

Here's a look at the headline operating results:

Data source: Ulta Beauty's financial filings. EPS = earnings per share. YOY = year over year.

What happened this quarter?

Sales growth accelerated for the second straight quarter even as gross and operating profit margins stabilized. Both the top- and bottom-line figures modestly outperformed management's outlook and represented improvements over prior quarters.

Here are the key highlights of the quarter: 

• Overall sales growth of 10% was due in part to the addition of 100 new stores. The sales growth rate landed at 16%, though, after accounting for the extra sales week in the prior-year period. Revenue at existing locations jumped 9.4% compared to 8% in the fiscal third quarter. This increase led to full-year sales growth of 8.1%, or just above the high end of management's early December forecast.
• The 9.4% sales spike was comprised of 7% higher customer traffic and a 2% boost in average spending per visit. Looking at sales by channel, seven full percentage points of the growth came from Ulta's physical locations, and the e-commerce segment contributed the rest. That marks a shift from prior quarters, which included a stronger tilt toward digital sales growth.
• Gross profit margin improved slightly after falling in recent quarters, suggesting that management's inventory-slimming initiatives helped clear the way for more full-price selling.
• Selling expenses were flat after rising in each of the last three quarters. Thus, operating income ticked up to 13.2% of sales from 13.1% a year ago. Ulta's more modest net income growth was mostly the result of tax changes.

Check out the latest earnings call transcript for Ulta Beauty.

What management had to say

CEO Mary Dillon said executives were happy with the holiday-season numbers. "The Ulta Beauty team delivered excellent results," she observed in a press release. "This performance reflects an acceleration in comparable sales in our retail stores, primarily driven by traffic."

Dillon went on to describe broadly positive results when compared to other beauty-products retailers. "We continued to gain significant share across all major categories, particularly with digitally native brands."

Looking forward

Ulta's 2019 outlook contained several important pieces of news for investors. As expected, the company plans to open 80 new stores this year compared to the 100 it has launched in each of the past two years. Comparable-store sales growth should slow to between 6% and 7%, management predicts, as the e-commerce segment moderates to a 20% to 30% increase against 35% in 2018.

The outlook is more clearly positive when it comes to profitability. Following nearly two years of declines, operating margin is expected to tick higher in 2019 -- although management believes these gains won't fully accrue until the third and fourth quarters.

Ulta also announced a change in its guidance approach that will see it end the practice of issuing an outlook for each upcoming quarter. Instead, the retailer will post an annual forecast that it will adjust, if needed, on a quarterly basis. Given the improving market-share trends in recent months, this shift doesn't appear to be an attempt to de-emphasize bad news, but rather to focus shareholders' attention on the wider retailing picture.