Ulta Beauty‘s (NASDAQ: ULTA) business is surging as the beauty product and spa services retailer steals market share both in physical stores and through its booming online sales channel.
Yet its stock trajectory is a different story. Shares are trailing the market this year heading into Ulta’s second-quarter earnings results on Thursday, Aug. 24. Below, we’ll look at the important trends investors will be watching in this report.
The growth pace
At a time when many national retailers are posting flat or declining revenue, Ulta stands out with its string of impressive — and improving — operating trends. Comparable-store sales spiked higher by 14% last quarter to blow past management’s 9% forecast.
Ulta enjoyed a healthy 6% boost in average spending per visit in the first quarter, but the real bright spot in the report was customer traffic growth. The retailer handled 9% more transactions for just a slight slowdown from the 11% increase it averaged over the 2016 fiscal year.
Soaring e-commerce revenue is playing a key role in comps growth, too. The segment spiked 71% last quarter and accounted for just over 3 percentage points of the retailer’s 14% comps gains. This week, investors will be looking for Ulta to meet or exceed management’s second-quarter comps forecast of between 10% and 12%, and they’ll be looking behind that figure for evidence that the healthy customer traffic momentum isn’t letting up.
Soaring e-commerce results are good news for the business in that they help Ulta protect market share from digital rivals while allowing it to extend its reach beyond its 990-store physical footprint. Commitment to this channel has its downsides, though. E-commerce sales are less profitable than retail sales and services, for example, and so as the revenue base tilts in that direction, Ulta risks losing profitability.
The retailer’s bottom line expanded nicely last quarter, with net margin jumping to 9.8% of sales from 8.6%. However, gross margin ticked lower, in part because of the higher mix of digital sales.
Given that management just raised their forecast for e-commerce revenue, it will be well worth investors’ time to keep watch on gross profit margin in the coming quarters.
CEO Mary Dillon and her team recently raised their 2017 sales growth forecast to a range of between 9% and 11%. That’s above the prior target of between 8% and 10% and it also far exceeds the long-term forecast of between 7% and 9% that management issued during an investor conference last year covering the fiscal years 2017 through 2019. At that conference, executives also outlined plans to increase operating margin by 2 full percentage points by the end of 2019 (to roughly 15% of sales) and to grow earnings per share at a 20% rate or better during the entire three-year period ending in 2019.
Zooming another step out, Ulta believes it can eventually reach as many as 1,700 stores in the U.S. market, representing a 70% increase over the current base. Management’s latest plans call for adding 100 new locations this year alone.
That’s an aggressive target given the weak traffic trends that many retailers are suffering through right now. But it makes sense for Ulta to expand quickly — as long as its existing shops continue racking up market-thumping sales and profitability gains.
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