Ulta Beauty (NASDAQ:ULTA) this week announced its second-quarter earnings results and updated all of its operating forecasts for 2019. The spa and beauty products retailer achieved modest growth in sales and profitably over the last few months. But management surprised investors by lowering its outlook due to weakening trends in the wider cosmetics market.

More on that forecast in a moment. First, here's how Ulta Beauty's results compared with the prior-year period:

Metric

Q2 2019

Q2 2018

Change

Revenue

$1.67 billion

$1.49 billion

12%

Net income

$161 million

$148 million

9%

EPS

$2.76

$2.46

12%

Data source: Ulta Beauty.

What happened this quarter?

Sales growth was at the low end of management's forecast for the year and slowed when compared with the prior quarter. Yet Ulta still generated strong earnings growth while making major investments in its stores and in the digital selling channel.  

A customer purchases hair products.

Image source: Getty Images.

The highlights of the quarter:

  • Sales rose 12% overall, versus 13% last quarter. The company benefited by about the same lift from new stores, 20 of which were launched in the second quarter. Yet sales at existing locations slowed to a 6% gain from 7% last quarter and 8% for the full 2018 year.
  • That comps gain was driven by a 5% increase in customer traffic and a less than 1% uptick in average spending per visit.
  • Gross profit margin was healthy, rising to 36.4% from 36% as the company stayed disciplined on its inventory buildup.
  • Selling expenses rose due to spending on labor and Ulta's e-commerce and customer loyalty initiatives. As a result, operating margin fell to 12.5% of sales from 13% a year ago.
  • Tax benefits and a falling share count helped earnings per share keep pace with sales gains.

What management had to say

CEO Mary Dillon expressed optimism about the chain's latest results. "The Ulta Beauty team delivered another quarter of solid top-line performance, gross margin expansion, and double-digit earnings growth," she said in a press release. But executives noted that recent demand trends were softening to the point that they threaten the retailer's 2019 ambitions. "We have updated our fiscal 2019 outlook," Dillon said, "to reflect the headwinds we are currently seeing in the U.S. cosmetics market."

Looking forward

Ulta still plans to open about 80 stores this year, a more cautious approach than the 100 stores it launched in 2018. That outlook wasn't hurt by the recent industry slowdown. It also hasn't budged since management announced plans to enter the Canadian market over the next year or so.

The consumer staples specialist lowered its sales and profit outlooks to reflect the latest demand trends. Rather than rising between 6% and 7%, executives now see comps improving in a range of 4% to 6%. Operating profit margin is now set to decline by nearly a full percentage point rather than tick higher, as Ulta predicted back in late May.

These shifts in the growth trajectory surprised investors, who sent shares lower immediately following the announcement. The stock had been up almost 40% so far in 2019. For its part, management expressed confidence in its growth approach, which had delivered accelerating sales gains and rising profitability before industry challenges knocked Ulta from that robust expansion pace last year.