Ulta Salon, Cosmetics & Fragrance Inc. Beats Expectations With Record Sales Growth

By Demitrios Kalogeropoulos Markets Fool.com

Image source: Getty Images.

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Even after preannouncing an upgraded sales growth outlook in October, Ulta Salon (NASDAQ: ULTA) managed to surprise investors this week by posting blockbuster third-quarter results. The beauty retailer beat its own aggressive guidance and -- for the fourth time this year -- boosted its full-year forecast.

Here's how the big-picture results stacked up against the prior year:

Metric

Q3 2016

Q3 2015

Year-Over-Year Growth

Revenue

$1.13 billion

$911 million

24%

Net income

$87.6 million

$71.1 million

23%

Earnings per share

$1.40

$1.11

26%

Data source: Ulta's financial filings.

What happened this quarter?

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A quickly growing store base combined with surging customer traffic produced one of the retail industry's most impressive quarters.

Here are the key highlights of the quarter.

  • Comparable-store sales soared by 17% to set a record for the company. Not only did it mark the third straight quarter of accelerating sales growth, but comps significantly outpaced the (raised) guidance that management issued in the middle of the quarter.
  • Customer traffic growth formed the foundation of the comps gains, with transactions rising 11% as average spending improved by 6%.
  • E-commerce growth accelerated for the third straight quarter to a 59% pace and was responsible for 2 percentage points of Ulta's 17% comps gain.
  • Gross profit margin ticked up to 38% of sales from 37%.
  • Spending on growth initiatives like Ulta's loyalty program kept expenses rising at a slightly faster pace than revenue. The company also significantly increased investments in new store openings and store remodels.
  • Overall, operating income surged by 26% to push profitability slightly higher, to 12.4% of sales from 12.2% in the year-ago period.

What management had to say

While noting Ulta's record sales and earnings performance, CEO Mary Dillon cited steady progress against a wide range of growth initiatives. "Our associates continue to execute against our growth strategies, resulting in success across several areas: new brand acquisition, increased Ulta Beauty brand awareness, rapid growth in our loyalty program, improving supply chain performance, and robust e-commerce growth."

Executives supplied greater detail in a conference call with investors, saying "strength on the top line was broad based, as we gained market share across all major categories." Dillon highlighted Ulta's 28% gain in loyalty members that pushed its band of active customers to nearly 22 million.

"We achieved the strongest quarterly comps of the year in all three channels, e-commerce growth was well above plan, and the retail and salon businesses also delivered their best top line growth of the year," Dillon said.

Looking forward

For the fourth time this year, Dillon and her team hiked their full-year sales and profit outlooks. Comps in the fourth quarter should be roughly 13%, which would translate into 14% growth for all of 2016, or slightly higher than the mid-October forecast. At the same time, adding 100 stores to its footprint will deliver an 11% boost in square footage and help produce overall sales growth of better than 20%, up slightly from the prior guidance.

Over the longer term, management believes growth will settle into an 8% comps pace for fiscal 2017 through 2019 as profitability expands significantly. But as recently as two months ago that forecast stood at 6%. If Ulta continues posting surprisingly strong comps powered by market-thumping customer traffic gains, though, even that upgraded forecast might turn out to be conservative.

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Demitrios Kalogeropoulos has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Ulta Salon, Cosmetics and 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.