Ulta Beauty (NASDAQ:ULTA) investors shifted their outlook on the business dramatically in late August, when the company lowered its growth forecast. Management said at the time that the makeup industry had begun shrinking to mark a sharp turnaround from the robust growth shareholders have seen in each of the last two years.
The beauty products retailer revealed this week that those industry challenges continue to limit its sales growth. On the bright side, Ulta is gaining market share and generating stable profits.
Let's take a closer look at the latest results.
The slowdown is here
The slowdown that investors feared, and that Ulta predicted back in August, has begun to occur over the last few months. Comparable-store sales gains fell to 3% versus roughly 6% in each of the last two quarters. Ulta Beauty's expanding store base kicked in further growth so that overall revenue improved 7.9% to $1.68 billion.
Looking deeper into the sales metric, customer traffic gains were 2%, while average spending rose by less than 1%. The traffic figure represents a slowdown compared to last quarter, while the sluggish spending supports management's claim that innovation trends are weak in the core makeup category. CEO Mary Dillon recently told investors that major makeup brands are failing to excite customers with their latest product launches, and that situation continued into the third quarter.
However, the company is outgrowing the industry, parts of which are now in retreat. "We continue to gain market share across all major beauty categories," Dillon said this week, "and we are extending our leadership position by creating stronger connections with our guests."
Ulta's finances were notably steady despite the more challenging selling conditions. Gross profit margin ticked higher thanks to rising prices and efficient marketing spending. Selling expenses rose, though, leading to a slight decline in operating income as earnings slipped to $168 million, or 10% of sales, from $169 million, or 11% of sales, a year ago.
The consumer staples retailer's net income landed at about the same $132 million, while per-share earnings rose 3% to $2.18 thanks to stock repurchase spending. "The team delivered another quarter of solid top-line performance, gross margin expansion, and EPS growth," Dillion summarized, "despite the current challenges facing the U.S. cosmetics category."
Ulta's updated outlook affirmed most of its prior targets. The company still sees comparable-store sales rising by about 5%, including an e-commerce boost of as much as 30%. Profitability is still on track to decline by less than 1 percentage point, too.
That drop would mark the second year in a row of falling operating margin, which is a disappointment given that the company entered 2019 with hopes of boosting that metric slightly. Still, investors can take the chain's affirmed outlook as good news for two reasons. First, it suggests the industry challenges won't be enough to knock Ulta into sales declines. And second, it demonstrates that Dillon and her team have a good grasp on industry trends and a strategy that can deliver market-share gains even in a slightly shrinking makeup niche.