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Ulta Beauty Earnings: What to Watch

By Demitri Kalogeropoulos – Aug 21, 2021 at 1:51PM

Key Points

  • The makeup industry rebounded sharply in Q1, and another big bounce could be in store for Q2.
  • Margins might keep rising thanks to a flood of innovative product releases.
  • Ulta might speed up its store expansion plans if demand continues accelerating.

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The spa and beauty products giant announces earnings results in just a few days.

Shareholders of Ulta Beauty (ULTA 0.22%) might be in for a big week. The stock of the spa and beauty products retailer has beaten a surging market so far in 2021, mainly because of the encouraging operating news that the company announced back in late May. In addition, sales trends spiked in the first quarter, which ended in late April.

Investors are hoping that this positive momentum carried through into the early summer months, but there are some other key metrics to watch beyond the basic sales trends.

Let's take a closer look at the second-quarter report, due out on Wednesday, Aug. 25.

A young person applies makeup.

Image source: Getty Images.

The health of the makeup industry

Ulta surprised Wall Street three months ago by painting a much brighter picture of the makeup industry and its market share in that niche. Sales jumped 65% to trounce expectations for a 40% revenue rebound from pandemic lows. Stripping out the noise from COVID-19, comparable-store sales were up 7% from the same period two years ago.

CEO Dave Kimbell and his team described a booming makeup niche supported by stimulus spending and a flood of new product launches. Most investors who follow the stock are predicting another record-setting performance this quarter. Sales are expected to reach $1.72 billion, compared to $1.7 billion two years ago and $1.2 billion last year. Beneath that headline figure, watch for signs of strength in customer traffic and Ulta Beauty's market share compared to rivals.

No need for promotions

Investors were thrilled to see strong profitability through the early phases of the economic reopening three months ago. Ulta improved its operating margin by 2 full percentage points thanks to rising demand for premium products, reduced promotions across the portfolio, and higher overall sales.

ULTA Operating Margin (TTM) Chart

ULTA operating margin (TTM) data by YCharts. TTM = trailing 12 months.

Look for a similar increase this quarter, especially given that the chain entered the second quarter with light inventory levels. Assuming no major shipping challenges, that posture likely allowed Ulta to quickly respond to any demand shifts for makeup, skincare, and beauty care products.

An updated outlook?

The biggest factor likely to move the stock this week is any shift in management's outlook. That forecast inspired a big upgrade in late May, with comps now expected to rise by 23% to 25% this year. In addition, the operating margin should hit roughly 11%, marking an improvement over the prior 9% forecast.

Robust consumer spending since then suggests Ulta might have room to lift that outlook again on Wednesday. But new COVID outbreaks will cut against that bullish reading.

In any case, look for management to reiterate a modest expansion plan that has the chain adding about 40 new stand-alone locations in 2021, in addition to the launches within Target (TGT -0.02%) stores.

That retailing partnership has room to grow if it continues to be a win-win for both companies. But first, Ulta has to show that its first-quarter sales rebound was more than just a temporary spike caused by pent-up demand from social distancing in late 2020.

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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