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Why Ulta Salon, Cosmetics & Fragrance, Inc. Soared 45% in 2015

By Demitri Kalogeropoulos – Jan 12, 2016 at 8:36AM

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With sales and earnings both up by more than 20%, last year was a great one for this beauty retailer.

What: Beauty retailer ULTA Salon's (ULTA -0.68%) stock jump 45% higher in 2015, according to S&P Capital IQ data.

ULTA Chart

ULTA data by YCharts.

The strong year put ULTA's market capitalization at nearly $12 billion -- up from just $3 billion in early 2012.

So what: ULTA's third-quarter results, announced on Dec. 3, was packed with the type of news that had investors bidding up its stock all year. Sales, net income, and per share earnings all spiked by 20% or better in Q3 as the retailer trounced consensus Wall Street estimates. Management also raised its full-year outlook for the third straight time in 2015.

Powering those record results has been a strong, and growing, uptick in customer traffic. ULTA logged 7% more transactions in each of the first two quarters of the year -- and an 11% increase in Q3. Its cosmetics, fragrance, skin care, and hair care products also attracted significant demand online: ULTA's e-commerce sales rose 56% last quarter and helped it post an incredible 13% rise in comparable-store sales.

Image source: Ulta.

While overall profit has soared higher, the company is seeing a minor drop in profitability. Gross profit margin fell by 1 percentage point, to 37% of sales last quarter. Yet that slip wasn't due to price cuts or sales promotions. It was the result of increased investments in building out the supply chain to support the fast-rising revenue footprint.

Now what: With customer traffic growth trending higher, ULTA last month raised its full-year sales and profit outlook -- yet again. CEO Mary Dillon and her executive team now believe comps will grow at 11%, compared to the 9% they projected in September (and the 7% they forecast at the beginning of 2015). Earnings will likely rise by at least 20% to around $4.75 per share.

The company's success at keeping its loyalty customers happy will be key to whether it hits those targets or not. ULTA boasts 17 million active buyers in its loyalty program, who are responsible for over 80% of sales. If Dillon and her team can use that program to drive repeat visits while increasing brand awareness, the retailer is likely to have turned in a strong holiday quarter.

Demitrios Kalogeropoulos has no position in any stocks mentioned. The Motley Fool recommends ULTA Salon, Cosmetics & Fragrance. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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