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What Ulta Beauty Wants You to Know

By Demitri Kalogeropoulos – Jun 3, 2019 at 2:03PM

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The spa and beauty products giant is on track to boost sales and earnings this year.

Ulta Beauty (ULTA -0.23%) is making the best of a difficult situation. The retailer announced earnings results that showed continued sales growth and steady profitability despite sluggish demand in a key makeup category.

That challenge didn't stop CEO Mary Dillon and her team from affirming Ulta's full-year outlook. Executives also announced plans to extend the store base outside of the U.S. for the first time.

Management added context to that global growth plan, and to Ulta's latest operating trends, in a conference call with Wall Street analysts. Below are a few highlights from that presentation.

A woman looking in a mirror and applying eye shadow

Image source: Getty Images.

Growth hits and misses

We're very pleased with the performance of fragrance, mass cosmetics, prestige iconic brands, prestige skincare, pro-hair, suncare, and PCA [skincare]. However, prestige cosmetics is still quite a bit softer than the rest of the portfolio with spring newness generally underperforming our expectations.
-- Dillon

Ulta Beauty overcame weakness in its prestige cosmetic segment to achieve solid growth to start 2019. A 4% customer traffic increase combined with 3% higher spending to send comparable-store sales up 7%, marking just a slight deceleration from the holiday season's 8% spike.

Management was happy with that result, saying it translated into market share gains across both mass cosmetics and the slow-growing prestige cosmetics segment.

Efficiency is helping

Total inventory grew 10% and was up 1.8% on a per-store basis, well below comparable sales, as we continue to gain efficiencies from improved systems and processes.
-- CFO Scott Settersten

Ulta had to run an expensive inventory clear-out event in mid-2018 to make way for the key holiday shopping season. Management isn't keen to repeat that process, which reduced earnings due to aggressive price cuts. To that end, Ulta is keeping a tight lid on inventory growth while still keeping in-stock levels high enough to keep customers satisfied. This success helped deliver steady operating margin this quarter while setting the company up for its first profitability increase since 2017.

Baby steps in Canada

The start-up investment to support the Canada launch is expected to put modest pressure on [earnings] this year, while we still expect to deliver financial results within our guidance range.
-- Dillon

Citing "competitive reasons," executives didn't relay much more solid information about the Canadian expansion they announced in the earnings press release. But management did say they've been studying outside markets for years now and are confident that Ulta's brand and its integrated approach to cosmetic sales should translate well into new markets and geographies.

Investors can expect the Canada launch to pinch earnings slightly in 2019 without knocking the company off of its annual outlook. The new market shouldn't materially impact sales or profits for the next two years, either, according to management. Still, executives said they're prepared to "scale quickly" as they learn and see what works through this initial move.

It likely won't be until mid-2020 at the earliest that Ulta will have a good idea of the size of its global opportunity. Until then, the company is still targeting a maximum store footprint of 1,700 across the U.S., compared to 1,200 today.

To that end, management affirmed their plans to launch 80 new locations this year, down from 100 in each of the last two fiscal years. Comparable-store sales are still projected to rise by between 6% and 7% for the year, or just a bit slower than 2018's 8% increase.

Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool recommends Ulta Beauty. The Motley Fool has a disclosure policy.

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