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Ulta Beauty Speeds Up Its Growth in Q4, but Sees Slowdown in 2020

By Demitri Kalogeropoulos - Mar 16, 2020 at 10:45AM

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The beauty products retailer had a good holiday season, but it projects slowing sales gains ahead.

Investors were cautiously optimistic heading into Ulta Beauty's (ULTA -2.35%) fourth-quarter earnings report, thanks to some encouraging operating trends in recent months. The spa and beauty products retailer managed to win market share in a weak selling environment last quarter and is moving ahead with aggressive plans to expand its store base.

On Thursday, Ulta announced positive sales results for the holiday period -- paired with a conservative outlook for the new year. Let's take a closer look.

A woman applying makeup.

Image source: Getty Images.

A nice sales boost

Sales at existing locations increased 4% over the fourth quarter, which includes the all-important holiday shopping period. That result ensured that sales gains slowed for the broader year, with comps landing at 5% compared to 8% in 2018.

However, Ulta outperformed management's growth targets even though the core makeup industry is shrinking. The latest sales boost also represented an acceleration over the prior quarter's 3% uptick. Meanwhile, growth was supported by an even balance between rising customer traffic and increased spending per visit. "The Ulta Beauty team delivered results ... at the high end of our expectations," CEO Mary Dillon said in a press release.

Profit updates

The consumer staples retailer managed to avoid cutting prices during the competitive holiday period, in part thanks to a lean inventory position at the start of the quarter. As a result, gross profit margin held steady at 35% of sales.

Selling expenses rose by nearly a full percentage point, though, due to extra spending in areas like e-commerce. Operating income growth was muted, then, as Ulta booked $288 million of profit for the quarter compared to $281 million a year ago. Operating margin slipped to 12.5% from 13.2% in late 2018.

For the broader year, that key profitability figure landed at 12.1% of sales compared to 12.7%. It was Ulta's third straight year of declining margin after the metric peaked at 13.5% of sales in 2017.

Looking ahead

Investors hoping to see signs of an impending earnings or growth rebound won't find much to celebrate in Ulta Beauty's new 2020 outlook. The retailer sees comps slowing again, down to between 3% and 4%. The chain's store expansion will also decelerate, with plans today calling for 75 new locations compared to 86 last year and 107 in 2018. Overall, sales should rise by between 7% and 8%, management said.

Ulta's earnings outlook implies more difficult selling conditions for a makeup industry that's been shrinking for more than a year. Operating margin should fall by nearly a full percentage point, executives said. Profits will likely land between $12.55 per share and $12.75 per share.

Those targets amount to market share gains and modest profitability declines, which would be a good result considering the weak industry environment today. Yet the management outlook doesn't include any potential impact from the coronavirus outbreak and the likely shift in consumer shopping behavior.

It will be a few weeks at least before Ulta has a better understanding of the scope of the hit that its business will take in 2020, so investors will have to wait for more updates from the management team as the picture becomes clearer.

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