Ulta Beauty Earnings: The Makeup Industry Comes Roaring Back

Ulta Beauty (NASDAQ: ULTA) had plenty of good news for investors in its latest earnings update. Revenue and earnings both exceeded the pace set by management’s full-year forecast thanks to a sharp traffic rebound at its stores.

The results looked great compared to the year-ago period when COVID-19 had devastated the business. But Ulta’s latest metrics also set new records for the company in key areas like sales, putting it in position to fully rebound in 2021.

Image source: Getty Images.

Surprise growth

The big surprise was growth. Heading into the announcement, Wall Street analysts were looking for sales to grow 40% year over year to $1.6 billion. That boost would have marked a solid rebound over last year while keeping Ulta’s business below its 2019 levels.

Instead, revenue jumped 65% to $1.94 billion, easily sailing past the $1.74 billion the company reported in fiscal 2019, its last pre-COVID first-quarter performance. The company got help from a booming e-commerce segment, but the biggest factor was a 53% spike in customer traffic.

Comparable-store sales grew 7% compared to 2019, management said. “We have emerged from 2020 with strong momentum in our sales trends, market share gains, and consumer sentiment,” company president Dave Kimbell said in a press release.

Higher consumer spending

The earnings haul benefited from a few positive factors, including rising average spending, higher prices, and a tilt in demand toward premium products in the makeup, hair care, and skin care niches. Gross profit landed at 38.9% of sales compared to 37.0% two years ago. Operating margin was similarly strong at 15.8% compared to 13.6%. Overall, net income surged to $230 million, reversing the prior year’s $79 million loss.

Cash flow was strong, and Ulta ended the period in a flexible inventory position thanks to the spiking demand. “The team delivered an outstanding start to the year,” CEO Mary Dillon said, “with sales and earnings exceeding fiscal 2020 and fiscal 2019 first-quarter levels.”

A big upgrade to the outlook

Ulta’s new outlook for fiscal 2021 is much stronger than the one management issued just three months ago. Executives now see comparable-store sales rising between 23% and 25% compared to the prior forecast of 15% to 17%. That boost implies the chain will more than fully rebound from the pandemic this year, rather than next year.

The earnings forecast got a big upgrade too with operating margin expected to reach 11%, up from 9%. While that’s still lower than the 12.1% Ulta reported in 2019, the trend suggests it won’t be long before Ulta can start expanding its profitability.

All that good news gives the company flexibility to pursue new store openings through its partnership with Target. That initiative provides a valuable growth avenue, but Ulta’s surging customer traffic also shows its store base has room to expand beyond the current 1,300 locations.

Investors were worried that this store footprint was destined to slowly inch higher over the next few years. But if Ulta can keep setting new traffic records, management can target faster store launches in addition to its other growth plans.

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

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