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Ulta Beauty Earnings: 3 Trends to Watch

By Demitri Kalogeropoulos - Mar 8, 2020 at 11:37AM

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Investors have big questions about this makeup retailer heading into Thursday's earnings report.

Investors gained confidence in Ulta Beauty's (ULTA 1.05%) operating outlook after the company announced generally positive earnings results back in early December. Sure, the spa and beauty products retailer is seeing some of its slowest growth in years. Yet Ulta is winning market share even as parts of the makeup niche shrink. Its earnings and profitability metrics are looking strong, too.

On Thursday, March 12, we'll find out if those big-picture trends held up through the fiscal fourth quarter. And CEO Mary Dillon and her team will likely issue an outlook for 2020 that will capture investor attention this week.

Let's take a closer look at three trends related to Ulta earnings and how they might affect the report.

A woman having her hair cut at a salon.

Image source: Getty Images.

1. Makeup industry updates

The broader makeup industry began shrinking in late 2018, and the pace of declines sped up through most of last year. That move had a negative effect on Ulta, whose comparable-store sales gains fell to 3% last quarter from 6% in the previous quarter. The company has pinned most of the blame on a lack of innovative product releases by major producers following several years of robust growth.

Most investors are expecting to see steady results this week, with overall comps landing at about 5% for the full 2019 year. That result would be in line with management's midyear forecast, and hitting that figure would imply stability and continued market share gains for Ulta. Keep an eye on where the growth comes from, too, as the retailer's third-quarter uptick was driven almost entirely by higher customer traffic. More spending per visit would suggest a potential turnaround in the innovation slump.

2. Profit challenges

Dillon told investors last quarter that the chain was entering the key holiday shopping season with a few important advantages, including a slim inventory position that was made up of high-quality, in-demand merchandise. Ulta also had an aggressive marketing and promotions plan aimed at driving traffic both to its stores and its online business. We'll learn on Thursday whether those advantages translated into healthy financial results.

To judge that success, watch gross profit margin, which edged higher in the third quarter thanks to rising prices and efficient marketing spending. Higher selling expenses, meanwhile, pushed operating margin down to 10% of sales from 11% a year ago. Investors are bracing for a decline in this key profitability metric for the full 2019 year, which would mark a second consecutive year of modestly falling profit margins.

3. Looking to the year ahead

The consumer staples retailer will announce its 2020 outlook on Thursday. Given the intense volatility in the market right now, investors are likely to focus on this prediction, along with management's comments about the general health of the industry. Assuming no big surprises over the past few months, that forecast will likely call for modest comps growth and flat or slightly declining operating margin.

An outlook like that would imply continued market share gains for Ulta, both in its stores and in its booming e-commerce segment that's expected to expand by about 25% in 2019. But investors might have to balance market share optimism against the prospect of another year of slowing growth and declining profitability.

 

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