Ulta Beauty Takes a More Measured Approach to Its Retail Expansion
Investors were optimistic heading into Ulta Beauty's (NASDAQ: ULTA) third-quarter report, which they expected to include accelerating sales gains for the first time in over a year. The beauty products and spa services retailer didn't disappoint in that key metric, but rising expenses and a conservative store growth outlook took some of the shine off of an otherwise strong report.
Here's a big-picture look at Ulta's headline operating results:
What happened this quarter?
Sales growth finally ticked higher after decelerating for five straight quarters. The growth reflected healthy gains in store traffic and in the digital sales channel. Spending spiked, though, sending EPS growth lower than in the previous quarter.
Here are key highlights of the quarter.
- Comparable-store sales landed at 7.8%, or near the top end of the guidance range that CEO Mary Dillon and her team issued in late August. That result marked an acceleration from the prior quarter's 6.5% boost.
- About half of the sales growth came from the digital sales channel, with e-commerce sales spiking 43%. Ulta also enjoyed a 5% jump in customer traffic and a 2.5% increase in average spending per visit.
- Gross profit margin held steady, suggesting firmer pricing trends.
- Selling expenses jumped as Ulta spent more cash on labor, marketing, and the online selling channel. As a result, operating profit margin fell to 10.8% of sales from 12.1% a year earlier.
- The company added 42 stores to its base and has launched 95 locations since the start of the year to essentially meet its fiscal-year target of about 100 new shops. Ulta Beauty operates nearly 1,200 stores.
- Net income rose at a faster rate than operating margin thanks to a far lower tax expense.
What management had to say
Executives said the latest results demonstrate the strength of the retailer's brand and its multichannel selling approach. "Ulta Beauty's strong performance," Dillon said in a press release, "reflects continued market share gains across all major categories, acceleration in our overall comp driven by healthy traffic, excellent new store productivity, and robust e-commerce growth."
Executives went into more detail about these wins in a conference call with investors, noting in particular the attractive economics of the latest crop of stores. "New stores continue to deliver sales ahead of our expectations," Dillon said.
Looking forward
Despite that success, Ulta Beauty says it is planning to scale back on its store expansion efforts over the next few years by opening 80 locations in 2019 and 75 in the following year, compared to about 100 in each of the last two years. Executives say they still see room for as many as 1,700 stores in the U.S. -- up from about 1,200 today. They want to be more deliberate about launches going forward, though, in an effort to strengthen the broader portfolio.
In the meantime, Ulta affirmed all of its key outlook metrics for the full 2018 year and still expects to boost sales by between 7% and 8% as operating margin falls by less than 1 percentage point. The digital sales channel should lead the way higher for the retailer, with gains approaching 40%.
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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.