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Ulta Beauty Narrows Its Growth Focus

By Demitri Kalogeropoulos - Mar 19, 2021 at 10:30AM

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The spa and beauty products retailer is aiming for fewer store openings this year as COVID-19 challenges keep pressuring the makeup industry.

Ulta Beauty (ULTA 12.47%) gave investors a flood of new information to process in its latest earnings report. That data included a strong finish to the 2020 fiscal year, along with some potentially worrying signs, such as turnover in the management team and a cautious outlook for 2021.

In a conference call with Wall Street analysts, CEO Mary Dillion, who just announced her intention to transition out of her leadership role, added context for shareholders on each of these points. Let's take a look at a few highlights from that discussion.

A salon customer having her hair blow-dried.

Image source: Getty Images.

Beating expectations

"We experienced less disruption from COVID-19 than we anticipated in the quarter," Dillon stated.

Ulta's comparable-store sales declines landed at 5%, equating to much better results than the 12% to 14% slump that management had initially predicted back in December. Pressure from the COVID-19 pandemic was weaker than expected, and so sales jumped online and customer traffic continued to rebound in stores. Ulta's 5% sales drop marked its second consecutive improvement following the 27% slump in the fiscal second quarter.

The retailer's loyalty program succeeded in keeping customers engaged over the holidays, and there were some standout product releases in the skin care, self-care, and general wellness categories. But makeup demand was still down thanks to social distancing and mask wearing. "We're encouraged by the momentum we're seeing," Dillion explained.

A multiyear rebound

"We expect much of 2021 will continue to be negatively impacted by masking requirements and social distancing. And while we expect sales trends will improve as we progress throughout the year and COVID-19 vaccines become more accessible, we are planning for total sales to be slightly lower than 2019," CFO Scott Settersten said.

Ulta's outlook for 2021 calls for a significant growth rebound but translates into a second straight year in which revenue fails to improve on 2019's result. Profitability will remain pressured, with operating margin landing at 9% compared to 4% last year and 12% in 2019.

The retailer made a few other comments that implied a slow rebound ahead, including plans to open just 40 new locations in 2021 and further cuts to employment in the salon segment. "Beauty enthusiasts still value the human connection," incoming CEO Dave Kimbell said, "but want to balance safety with the desire to discover and play with product."

A transition at the top

"I'm confident that under Dave's leadership, Ulta Beauty will keep shaping and leading the beauty industry for many years to come," Dillon stated.

Dillon will be stepping out of the CEO role by June after about eight years leading the retailer. Kimbell will take over during a challenging time as the COVID-19 recovery stretches into its second year. Ulta Beauty doesn't have ambitious goals for store expansion right now and has scrapped its prior plans to enter Canada. Given the tough industry conditions, executives are happy to narrow their focus to growth through e-commerce gains and the new Target partnership.

That strategy should have the business setting new annual sales and profit records by 2022, but investors will have to stay tuned to learn precisely where Kimbell and his management team will take the retailer on the next phase of its growth journey.

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