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Ulta's Beautiful New Margin Target: 13% of Sales

By Demitri Kalogeropoulos – Aug 27, 2021 at 12:46AM

Key Points

  • Robust industry growth is powering record sales and profitability increases.
  • Ulta is also improving its efficiency with lighter inventory holdings and a smaller average selling footprint.
  • Management issued a major upgrade to its 2021 outlook.

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Higher profitability might stick around even after the current sales boom subsides.

Investors had high hopes heading into Ulta Beauty's (ULTA 0.22%) second-quarter earnings report in late August, and they weren't disappointed.

The beauty products retailer recently posted accelerating growth and spiking profitability, which together convinced management to significantly upgrade its outlook for the year. Ulta is now on track for a banner 2021 that sets a new standard for earnings power.

More on that 2021 forecast in a minute -- first, let's take a closer look at the latest operating trends.

Person putting on makeup.

Image source: Getty Images.

Beating targets

Comparable-store sales jumped 56% to help lift overall revenue up to $2 billion. Wall Street was looking for closer to $1.7 billion, which would have marked just a modest increase through the two-year period that ended in late July. Instead, Ulta gained share even as the makeup industry came roaring back.

"This performance reflects the recovery of the beauty category," CEO Dave Kimbell said in a press release, "investments and choices we've made over the last year...and the ongoing efforts of our associates to deliver great experiences to our guests."

Ulta got another lift from its expanding store base, with seven new locations added to the footprint. But that expansion pace is still more conservative than investors had seen as recently as 2019. "We are evolving and innovating to lead in the new beauty landscape," Kimbell said.

Higher margins might be here to stay

Kimbell, who only recently took over the CEO position, highlighted Ulta's strengthening profitability, which really shined through this quarter. Operating income was $332 million, or 17% of sales, compared to $13 million, or 1% of sales, a year ago.

The results look just as good when judged against a more normal performance, as Ulta's operating margin sat at below 13% of sales at the same time in 2019.

Chart showing upward trend in Ulta's TTM operating margin.

ULTA Operating Margin (TTM) data by YCharts

Several factors are driving profitability higher, including light inventory levels, a flood of new releases by makeup manufacturers, and an unusually strong consumer spending environment. It's also helping that the chain is focused on smaller-footprint stores, like its recent partnership with Target (TGT -0.02%).

Looking ahead

Investors were treated to a big upgrade to Ulta's outlook. Growth will be much faster than the company envisioned back in late May. Instead of landing at between $7.7 billion and $7.8 billion, a new record, sales will range from $8.1 billion to $8.3 billion, executives estimate.

Perhaps more importantly, earnings will soar. Operating margin is now set to jump to 13%, compared to the 11% prior target. That would mark a better performance than Ulta could manage in the last full year before the pandemic struck.

It's not clear whether the chain's margins will sink back down with more normal economic conditions. But the good news is that Ulta's conservative financial approach is lessening the risk in the business, while boosting efficiency. Those factors should help support solid returns for shareholders, no matter how long the industry upturn lasts.

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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