Ulta Beauty Sets Its Sights Higher

Ulta Beauty (NASDAQ: ULTA) is ready to go global. The spa and beauty product retailer this week announced its intentions to expand into Canada, its first international market, in conjunction with earnings results that kept the chain on track to meet management's 2019 outlook.

Management didn't reveal the timing of the expansion, or how it might change Ulta's growth guidance, but investors are likely to see updates to that forecast in the months to come.

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In the meantime, here's a big-picture look at the headline operating results from the quarter that just closed.

What happened with Ulta Beauty this quarter?

Sales growth landed right where management had projected and profitability didn't budge. Together, these trends showed steady momentum when compared to the second half of fiscal 2018.

Here are the key highlights of the quarter:

  • Overall sales growth was 13% thanks mainly to the launch of 89 new stores over the past year. Ulta's existing locations contributed healthy gains, although the pace was slower than investors have seen in recent quarters. Comparable-store sales rose 7% compared to 8% in the past full fiscal year. Comps growth was powered by a 4% boost in customer traffic and 3% higher average spending.
  • Gross profit margin inched higher by less than a percentage point thanks to the company's lean inventory position and reduced reliance on price cuts.
  • Selling expenses outpaced revenue growth due to spending on labor and Ulta's growth initiatives. As a result, operating margin held steady at 13.6% of sales.
  • Reduced tax expenses allowed net income to jump anyway, up to $192 million, or 11% of sales, from $164 million, or 10.6% of sales, a year ago.

What management had to say

CEO Mary Dillon said the company overcame a weak selling environment in some product niches to achieve solid overall operating metrics. "These results reflect a healthy balance of traffic and ticket growth," she said in a press release, "and double-digit comparable sales growth in mass cosmetics, skin care and fragrance, tempered by continued mixed performance in prestige cosmetics."

Executives said they were excited to announce initial efforts to make Ulta Beauty a worldwide brand. "Our first step in becoming a global beauty retailer," Dillon explained, "will be to prepare to launch operations in Canada."

Looking forward

The international move might speed store growth back up after management slowed the launch pace to 80 stores this year from 100 in each of the last two fiscal years. Ulta has 1,200 stores and had previously said it was aiming for between 1,400 and 1,700.

As far as the next few quarters, management affirmed all their key financial targets. They still expect Ulta to grow comps by between 6% and 7% this year to mark a slight slowdown from 2018. An extra 80 locations, meanwhile, is expected to help push overall sales higher by at least 10%. Ulta Beauty still believes operating profit margin will inch higher after declining for most of the last two years.

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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.