Ulta Beauty (NASDAQ: ULTA) is back in Wall Street's good graces for the first time since mid-2017. That's when the spa and beauty products specialist started reporting slowing sales growth. It's also around the time that management stepped back from their target of increasing profitability each year.
But the company made a few key investments in late 2017 and 2018 that set it up for stronger operating and financial results. Investors saw those initiatives begin to pay off in recent quarters, and they're hoping for signs of building momentum when Ulta announces its fiscal Q1 2019 results on Thursday, May 30. Let's look at the key metrics to follow in that earnings report.
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Fiscal 2018 worked out about as well as investors could have hoped given the sluggish start for the cosmetics industry. Despite that challenge, Ulta managed to grow comparable-store sales by 8.1% for the year to edge past management's initial target.
E-commerce gains were a bit lower than expected, rising 35% compared to 60% in the prior year. But the chain enjoyed stronger demand in its physical locations as more beauty shoppers opted for the in-store experience. Tack on an additional 100 locations in the selling base, and Ulta achieved a 14% sales increase overall last year. That's below the over 20% annual boosts investors saw in past years, but it's still a high-growth result.
For the current quarter, most investors who follow the stock are expecting to see sales rise by about 13% to $1.75 billion. Ulta should continue to gain market share both online and in stores, but the pace of gains is likely to slow as compared to 2018.
The news is more decidedly positive on the earnings front. Ulta made some tough decisions in mid-2018, including bulking up the online segment and clearing out slow-moving products with a massive sales event. The good news is these initiatives allowing it to enter the holiday season with a lean, flexible inventory position. That posture paid off by pushing both gross and operating margins higher in that competitive period, and the gains should accelerate in 2019.
On Thursday, look for Ulta's gross profit margin to at least hold steady, which would suggest healthy pricing power across its digital and in-store sales channels. Operating margin should inch higher, meanwhile, as the chain begins scaling back on the aggressive investments it has been making in bulking up its e-commerce infrastructure.
Updating the outlook
CEO Mary Dillon and her team are targeting their first annual profitability increase in three years, and that bright financial outlook is a key reason why the stock has rebounded to trounce the market so far in 2019. Management's projections aren't uniformly positive, though, as they include a further slowdown in both the e-commerce segment and in growth at Ulta's existing stores. The company is also launching new locations at a pace of about 80 per year compared to 100 as recently as 2018.
Each of those trends will likely pressure sales gains, but the chain is still aiming for a double-digit revenue boost this year. And, with profitability finally on pace to stabilize and potentially rebound, investors will have a few good reasons to support a business that's shown an ability to gain market share even through relatively weak industry selling conditions.
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