Ulta Beauty (ULTA -13.37%) shares jumped late last week after the company reported third-quarter sales and earnings results that were better than investors had feared. Yes, the spa and beauty products retailer announced a significant slowdown in demand growth. However, revenue continued climbing at its stores and the wider industry looks healthy.
In a conference call with investors following the Dec. 5 report, CEO Mary Dillon and her team explained the factors impacting Ulta's growth today while discussing why the company can still post higher revenue and profits in a tough selling environment. Below are a few highlights from that chat with Wall Street analysts.
1. The makeup niche is still shrinking
After several years of robust growth, the [makeup] category began to decelerate in 2017 and turn negative in late 2018, resulting from a lack of engaging newness and incremental innovation. This negative trend has continued through 2019 with further deceleration in the most recent quarter.
The tough industry trend that investors saw hints of back in late August is now here. Comparable-store sales gains fell to 3% from 6%, in fact, thanks to declines in both the prestige and mass-market segments of the makeup niche. Executives stressed the fact that they judge the slowdown to be a simple cyclical issue that, while it might take time, will eventually reverse itself.
In the meantime, management is happy to see that Ulta is gaining market share in both of these shrinking categories and in places like skincare, bath, and fragrances, which account for about one-fifth of sales. The consumer staples retailer is also enjoying modest customer traffic growth in stores, with e-commerce sales rising by about 20%.
2. Ready for the holiday season
We continue to manage our inventory well, improving inventory productivity while maintaining strong in-stock positions. Total inventory grew 8.9% and increased 2.1% on a per-store basis, nicely below the comp rate, due to an increase in net new stores and the timing of inventory shipments ahead of the holiday season.
-- CFO Scott Settersten
Ulta likes its inventory position heading into the key holiday shopping season, both in terms of the volume of products it is holding and the quality and appeal of those items. This optimism is supported by the fact that margins inched higher in the third quarter thanks to cost cuts and higher pricing. Ulta noted a few other positive initiatives that are paying off, including its loyalty program and a full slate of exclusive brand assortments.
3. The year is going about as planned
While we've refined our full-year guidance to reflect our year-to-date performance, our expectations for fiscal 2019 have not materially changed since our last earnings call.
Ulta affirmed most of the key aspects of the 2019 outlook management issued three months ago and still expects sales to rise as operating profit margin inches lower. Executives will issue a detailed 2020 outlook after the fourth-quarter results are announced in March, but today they still believe the selling conditions will be challenging. With that in mind, Ulta is slowing some of its expansion projects while focusing a bit more on strengthening its existing network.
Investors were happy to hear that the makeup category's recent slump is more modest than appeared likely back in August, but that's not the right place for shareholders to focus, according to management. "It's a little easy to get distracted by the short term," Dillon said, but "our long-term view is that we have the winning model [that's] proven by the fact that we're driving market share growth."