Investors had high hopes heading into the earnings announcement from Ulta Beauty (ULTA -0.62%). The salon and beauty products retailer lifted its growth outlook just before the holiday season kicked off after growth accelerated in the third quarter.
Ulta's actual fourth-quarter results outpaced that upgraded forecast, giving the company solid momentum heading into 2022. Management also projected confidence around growth and profitability over the next year as the chain takes another big step toward achieving $10 billion in annual sales.
Let's take a closer look.
Sales trends
Sales gains were impressive through late January. Revenue rose 21% at existing locations to more than offset the losses that Ulta endured a year earlier during a more acute phase of the pandemic.
Image source: Getty Images.
That success pushed annual sales up to $8.63 billion, or just above the guidance range that CEO Dave Kimbell and his team issued in early December. "Our fiscal year ended with better-than-expected performance," Kimbell said in a press release, "reflecting...stronger consumer demand and the strength of Ulta Beauty's differentiated model."
That model stresses hands-on shopping for premium skin care, hair care, and makeup products, which were all in high demand in late 2021. Ulta Beauty notched a 10% boost in customer traffic, in fact, even as average spending rose 10%.
Profitability wins
The management team did a great job securing inventory and pricing those products to keep up with inflation. Gross profit landed at $1 billion, or 38% of sales, compared to 35% of sales a year earlier. Ulta Beauty's operating margin hit a blistering 15%, or a bit more than executives had forecast just a few months ago.
ULTA Operating Margin (TTM) data by YCharts
Ulta's ambitious target had been a 13% operating margin, but it now appears to be on a stronger profitability and earnings path. Even spiking labor costs weren't enough to knock the chain off of this trend, and selling expenses held steady at about 24% of sales.
Looking ahead
Management was cautiously optimistic about the next year, which should involve another year of sales growth as the makeup and beauty products market rebounds. Sales should rise to roughly $9.1 billion, executives projected.
Profitability will fall slightly, but at about 14% of sales, it will stay well above Ulta's long-term target. That should translate into earnings of between $18.20 per share and $18.70 per share compared to last year's $17.98 haul.
The chain is accelerating its new store expansion strategy, but only modestly. Executives plan to open about 50 locations in 2022, up from 44 last year. That annual growth figure is still down significantly from the nearly 100 stores Ulta was opening just a few years ago.
Investors shouldn't worry much about that more cautious expansion pace, as more demand is shifting to Ulta's online channel and its in-store partnership with Target. And, as existing locations handle more traffic and higher average spending, they are becoming much more efficient financially.
All of those factors point to continued strong returns for investors holding on to this successful growth stock.
