Ulta Beauty's (ULTA 0.31%) Q4 results easily surpassed the conservative outlook that management issued just a few months ago. The retailer's growth trends improved over the holiday quarter rather than decelerating as executives had predicted in early December.

That success gives the beauty products giant valuable momentum heading into fiscal 2021, which should bring an impressive growth rebound following last year's 17% sales drop. But a few details, including management's store expansion plan, point to difficult selling conditions ahead.

Let's take a closer look.

Sales beat expectations

The big takeaway from Ulta's last three months of sales is that demand trends are improving. CEO Mary Dillon and her team warned that the holiday season might be tough, with revenue falling by as much as 14% at existing stores. Instead, comparable-store sales declined just 5% to mark an improvement over the prior quarter's 9% slump.

A young woman applies eye makeup.

Image source: Getty Images.

This success meant that overall revenue fell 5% while most investors were bracing for a harsher 10% drop. "The team," Dillion said in a press release, "delivered better-than-expected results for the fourth quarter."

Drilling down

Looking beyond the headline number reveals more reasons for optimism about the recovery. Gross profit margin held steady after plunging in recent quarters, which implies strong pricing trends both in stores and online. Selling expenses rose, but the increase wasn't as bad as shareholders saw earlier in 2020. As a result, Ulta finished the year with solid profitability. Operating income landed at $224 million, or 10% of sales, compared to $288 million, or 12.5% of sales, a year ago.

Inventory levels fell, too, which means the retailer is heading into the new fiscal year free from the heavy burden of slow-moving makeup and skin care products. "We begin fiscal 2021 with a strong foundation in place and good operational momentum," Dillon said.

Tough new realities

Yet Ulta's short-term outlook reflected a cautious reading on the makeup industry. Sales will rise to between $7.2 billion and $7.3 billion in 2021, management said, which means a full revenue recovery won't happen until at least 2022 (Ulta booked $7.4 billion in annual revenue in 2019). The profitability rebound will be just as slow, with operating margin likely hitting 9% in 2021 compared to 12% in 2019, before the pandemic struck.

Ulta is also expecting to open just 40 new stores this year compared to the 86 it launched in the last pre-pandemic year. That slower expansion includes the suspension of the chain's proposed entry into Canada. The cautious launch strategy also promises to limit sales growth opportunities over the next few years, even as the company adds hundreds of smaller locations within Target stores.

Separately, Ulta announced that Dillon will be stepping out of the CEO role in June, with Dave Kimbell set to take over. Additional changes include a new chief operating officer and transitions in the board of directors.

These executives will step in at a challenging time for Ulta Beauty, which is projecting a multiyear path toward a full rebound from COVID-19. The longer-term growth outlook is cloudy, too, now that a big boost in the store footprint is off the table until at least 2022.