Ulta Beauty Earnings: 3 Things to Watch

Ulta Beauty (NASDAQ: ULTA) will announce its second-quarter earnings results after the market closes on Thursday, Aug. 30. The spa and beauty products retailer's stock has underperformed the market over the last year as both its market-thumping growth rate and profitability have declined.

But with the broader industry showing signs of strength, those top- and bottom-line trends might improve heading into the second half of the fiscal year. Below, we'll take a closer look at the metrics that are likely to dominate Thursday's report.

Sales gains

Ulta Beauty's 8% comparable-store sales gain last quarter might sound impressive, given that it was more than double the expansion rate of larger retailers like Target. However, that figure marked the fourth consecutive slowdown for the beauty retailer. Comps growth was 9% in the prior quarter, in fact, and had routinely reached into the double digits before that.

Weakening demand in the core makeup category has been the key driver behind that slowdown, and so investors will be watching for any change to that dynamic on Thursday. Within the comps figure, meanwhile, keep an eye on customer traffic. That metric came in at 5% last quarter, and a bounce here would likely form the basis for any surprising growth figures from Ulta Beauty. But as of late May, CEO Mary Dillon and her team predicted that comps would end up between 6% and 7% this quarter.

Digital trade-offs

While sales growth in stores has underperformed management's hopes lately, the e-commerce channel is delivering better-than-expected results. Ulta Beauty logged a 48% spike in digital sales last quarter and those gains represented just under half of its overall comparable-store sales growth for the quarter.

There's a "good news, bad news" element to that digital success. On the plus side, it has allowed the company to affirm its broader growth targets even as customer traffic slowed in stores. However, the boost is pushing profitability lower since margins aren't quite as robust on the e-commerce side of the business.

Digital sales are now on pace to reach toward 15% of the overall business, perhaps as early as this year. That's a far faster growth pace than management had originally projected, and while they're doing everything they can to maintain the positive momentum, that sales shift has pushed profitability lower. Executives believe the profit pinch is just temporary, and so investors can expect to hear more about the broader operating margin trend on Thursday. At last count, the metric slipped to 13.6% of sales from 14.3% a year ago.

An updated outlook

Ulta Beauty affirmed its full-year sales outlook in late May, with growth expected to slow to about 7% compared to 11% in 2017. Investors are likely to see an update to that forecast now that half of the fiscal year is behind us and preparations for the upcoming holiday shopping season are well underway.

Assuming sales growth at least holds steady, though, it's feasible that Dillon will affirm aggressive plans to open roughly 100 stores each year in hopes of eventually expanding to as many as 1,700 locations from today's 1,100 mark. After all, even after the latest slowdown, its locations generate healthy cash flow and are on pace to produce another year of over 20% earnings growth in 2018.

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