Ulta Beauty Inc. Second-Quarter Earnings Spike 28%

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Ulta Beauty (NASDAQ: ULTA) announced sales results this week that hit the high end of management's guidance. The spa and beauty supplies retailer also raised its growth outlook for the second time this year.

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More on that rising forecast in a moment. First, here's how the big-picture results stacked up against the prior-year period:

 Metric

Q2 2017

Q2 2016

Year-Over-Year Change

Revenue

$1.29 billion

$1.07 billion

21%

Net income

$114 million

$90 million

27%

Earnings per share

$1.83

$1.43

28%

What happened this quarter?

Sales growth was strong thanks to a balanced mix between rising customer traffic and increased spending per visit. Ulta Beauty also benefited from soaring e-commerce sales that imply the retailer is winning market share both online and through its physical locations.

Key highlights of the quarter include:

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  • Comparable-store sales jumped 12% to hit the high end of management's late-May guidance that called for comps of 10% to 12%.
  • The comps gains were split almost evenly between a 5.5% customer traffic improvement and 6% higher spending. However, that traffic figure represents a significant slowdown from the prior quarter's 9% spike.
  • E-commerce sales jumped 72% to just under $100 million as Ulta's website redesign and improved product offering resonated with shoppers.
  • Gross profit margin ticked up to 36.4% of sales from 36%.
  • Ulta Beauty added 20 new stores, passing 1,000 locations.
  • Bottom-line profitability improved to 8.9% of sales from 8.4%.

What management had to say

Executives were pleased with the latest operating trends. "The Ulta Beauty team delivered another quarter of excellent performance with strong top line growth coupled with robust margin expansion," CEO Mary Dillon said in a press release. "We accelerated our market share gains," Dillon continued, "while continuing to reduce promotional intensity and increase personalized offers through our industry leading loyalty program."

Management highlighted the fact that high-margin beauty offerings are finding some of the healthiest demand. "Product category strength was broad based, with prestige cosmetics still driving the majority of our growth, and with skincare, fragrance, and haircare all gaining momentum," Dillon explained.

Looking forward

Dillon and her team raised their full-year outlook for the second time this year and now see comps improving by between 10% and 11% in 2017, up from the prior target of 9% to 11%. The company's initial reading, back in March, forecast growth of 9% at the midpoint of guidance.

Booming digital sales will play a key role in those gains, with the e-commerce channel now set to expand by as much as 60% compared to Ulta Beauty's prior 50% reading. This success is so far more than offsetting the slight slowdown in customer traffic growth.

Executives still aim to add 100 locations to the store footprint this year as they take a big step toward the 1,700 retailing spots they believe the U.S. market will support over the long term.

As for the bottom line, management would like to see operating margin rise to 15% by 2019. The business is progressing directly according to that aggressive plan so far. Through the first six months of the fiscal year, operating income was $368 million, or 14.2% of sales, compared to $290 million, or 13.6% of sales, in the prior-year period.

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Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Ulta Beauty, Inc. The Motley Fool has a disclosure policy.