Investors had modest expectations heading into Ulta Beauty's (ULTA -0.25%) second-quarter earnings report Thursday afternoon. While store reopenings and booming e-commerce sales were likely to create a better sales environment than the chain endured in Q1, revenue and profits still had a long way to go to fully recover.
This week, the beauty products retailer revealed steadily improving trends through August while warning that the next few quarters could be challenging.
Let's take a closer look.
Things are getting better
Ulta easily cleared the low bar it set in the previous quarter when temporary pandemic-related store closures hammered the business. Sales declines improved to 26% from 33%, but the news looks better when you look at the monthly revenue cadence.
Steady store reopenings pushed monthly losses to the mid-single-digit range in early August, management said, compared to 10% in July and 37% in early May. "While the pandemic continues to impact our business," CEO Mary Dillon said, "we are encouraged by improving trends."
The digital selling niche was a standout performer again, with e-commerce sales soaring by more than 200%. Roughly 90% of its stores are open as of early August, and salon services are available in about 85% of its locations.
Finances and cash trends
The chain managed to reduce expenses as a percentage of sales, which is a big win given the plunging revenue base. But that success wasn't enough to offset plunging profitability: Gross margin fell to 27% of sales from 36% of sales a year ago.
Still, Ulta managed to stay (barely) profitable overall, with operating income landing at 1% of sales compared to 12.5% last year. That decline, plus COVID-19-related impairment charges, reduced operating cash flow to just $16 million in the first half of 2020 compared to $447 million in the prior-year period. But the company is in no danger of an immediate cash crunch. Thanks to new debt and improving sales trends, it has over $1.1 billion in cash and cash equivalents on its books today.
Dillon and her team declined to issue an operating outlook given the fluid selling environment. But executives did say that they expect a "new normal" sales cadence that will be both volatile and challenging as consumers continue to limit their shopping experiences.
The retailer expressed confidence in the long-term health of the industry and Ulta's leadership position in the beauty niche. But management's early comments on its store expansion plans suggest that the rebound will take some time. After several years of opening around 100 locations annually, Ulta may add just 30 stores in fiscal 2021.
Ulta had pointed out in the past that the pandemic is creating attractive real estate deals that the company could capitalize on as it moves toward its long-term goal of operating 1,700 locations in the U.S. and additional stores in Canada and other international markets.
However, with 19 stores set to permanently close in the fiscal third quarter, the chain is making extremely modest progress toward those ambitious global plans. In fact, the challenging short-term industry trends mean that the store base isn't likely to meaningfully move beyond 1,300 locations until at least fiscal 2022.