Ulta Beauty (NASDAQ:ULTA) didn't have much good news for investors in its recent second-quarter earnings report. The period included several weeks of intense social-distancing efforts around the country, and demand remained weak even after stores restarted their operations in June and July.
But in a conference call with Wall Street analysts, CEO Mary Dillon and her team highlighted some encouraging signs of strength for the brand even though a full operating rebound might be several quarters away.
Let's take a look at some highlights from that presentation.
Meeting low expectations
Sales for the quarter were in line with our internal expectations, with sales from e-commerce a little stronger and [from] stores a little softer than expected.
-- CFO Scott Settersten
Demand trends shifted dramatically during the period as stores came back on line and shoppers adjusted to the new realities of COVID-19. Customer traffic plunged by 36% year over year, which was the biggest factor behind Ulta's 26% revenue decline. That slump was partially offset by soaring e-commerce demand and higher spending on each order.
Looking deeper into demand trends, executives said makeup, its core category, shrank as social occasions started plummeting during the pandemic. Shoppers are spending more on home skin care products, though. Management was happy with Ulta's success in implementing curbside pickup and scaling up in-store fulfillment of online orders.
Shrinking the footprint
We believe it will take some time to fully return to pre-COVID levels and expect demand will continue to be suppressed for the rest of the year given the likely ongoing disruptions. We'll see as we continue to live with the realities of COVID-19.
Ulta is predicting a full recovery of the makeup niche and of the broader beauty industry that includes its salon services. That rebound is likely several quarters away, though, and so executives are taking some aggressive steps aimed at scaling back its footprint.
Many of the 33,000 employees it furloughed when it initially closed its stores will not be coming back, as the chain is permanently closing 19 locations and reducing capacity across the board. Ulta is eliminating some management roles at the stores, too. The company has also scaled back its inventory to reflect the new, slower customer traffic pace and changing consumer needs. This shift happened through a mix of write-down charges and aggressive price cuts.
Store growth plans
As we plan growth beyond this year, we will seek to balance the opportunity for lower rents with the opportunity to upgrade existing locations.
Ulta still says it sees room for as many as 1,700 stores in the U.S. market over time, compared to its current 1,300 unit base. Yet investors should expect a much slower expansion rate in 2020 and likely into 2021.
While COVID-19 has created plenty of cheaper mall real estate, executives aren't aggressively taking advantage of these deals to add more locations. Instead, the company may open just around 30 stores next year as it prioritizes getting back to strong profitability and cash flow at its existing locations.
The retailer will still benefit from lower rent expenses as it renegotiates with landlords. But the high likelihood of a weak selling environment at least into early next year has Ulta feeling cautious about its expansion strategy over the short term.