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Ulta Beauty Has a New Outlook

By Demitri Kalogeropoulos - Jun 3, 2021 at 12:00PM

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Management explains why they're so much more optimistic about 2021.

Ulta Beauty (ULTA 0.98%) recently shocked inventors by announcing a surprise return to sales growth in early 2021. Not only did the first quarter represent a huge increase compared to a year ago when COVID-19 shutdowns were peaking, but revenue set a new absolute record, too.

In a conference call with Wall Street analysts, incoming CEO Dave Kimbell and his team explained what that success means for the rest of 2021, and for Ulta's greater growth ambitions.

Let's look at a few highlights from that presentation.

A person getting their hair washed at a salon.

Image source: Getty Images.

1. Winning market share in a growing industry

"We increased our market share across all major prestige beauty categories," Kimbell said. "Additionally, we saw terrific strength across our mass categories and believe we are increasing our share within mass beauty as well."

Just about everything was working for Ulta Beauty last quarter, with support coming from relaxed social distancing needs, federal stimulus measures, and a flood of new launches from makeup, beauty, and skincare producers.

Yet the company gained more than its fair share of that industry growth as beauty shoppers increasingly chose its stores and its e-commerce platform over rivals.

Revenue shot up by 66% compared to last year and increased 7% compared to the Q1 period from 2019. "Sales were strong across channels," Kimbell said, "with stores leading the way as consumers were increasingly comfortable with shopping [in person]."

2. Profit gains and losses

"Strong top-line growth, especially in brick-and-mortar, combined with the impact of our cost optimization efforts, resulted in robust operating margin performance," CFO Scott Settersten commented.

The big picture on profits was bright, as margins expanded compared to last year and 2019. Ulta's cost-cutting program amplified gains from the rising sales base and lowered the need for price cuts, allowing earnings to rise much faster than revenue did.

It wasn't all good news on this score, though. Makeup is still a smaller portion of the full business today than it was a year ago, and that's a niche that tends to carry higher margins. Ulta also benefited from temporary lifts like reduced labor costs in the salon section. Still investors should be happy with the healthy operating margin, cash flow, and inventory trends that the retailer notched to start 2021.

3. A much brighter outlook

"While the presence of vaccines and new CDC guidance gives us optimism for the recovery, our visibility into the trajectory and sustainability of recent trends is limited and the second half of the year remains difficult to forecast," Settersten added.

Ulta doesn't have a clear enough view of demand to make concrete predictions for the second half of the year. Yet its surging customer traffic through Q1, and early Q2, gave management confidence to raise their full year forecast. Sales will set a new record this year rather than next year, executives said, and profit margin will rebound to 11% of sales from 9%.

The company didn't make any changes to its modest store growth plans that call for just 40 new locations in addition to the smaller format Target launches. But another few quarters of this level of performance could have Ulta looking to accelerate its expansion pace again after having pushed the brakes over the past two years.

Demitri Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Ulta Beauty. The Motley Fool has a disclosure policy.

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Ulta Beauty, Inc. Stock Quote
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