Ulta Beauty hints at tough retail conditions ahead
Ulta Beauty‘s (NASDAQ: ULTA) Fourth quarter results far exceeded the cautious outlook issued by management just a few months ago. The retailer’s growth trends improved in the holiday quarter rather than slowing down as executives predicted in early December.
The success gives the cosmetics giant valuable boost as we approach fiscal 2021, which is expected to lead to an impressive growth rebound after sales fell 17% last year. But a few details, including the management’s store expansion plan, point to tough sales conditions ahead.
Let’s take a closer look.
Sales exceed expectations
The big takeaway from Ulta’s last three months of sales is that demand trends are improving. CEO Mary Dillon and her team have warned the holiday season could be tough, with revenue declining by up to 14% at existing stores. Instead, same-store sales fell only 5% to mark an improvement from the 9% drop in the previous quarter.
This success means that overall revenue fell 5% as most investors braced for a 10% more severe decline. “The team,” Dillion said in a press release, “produced better than expected results for the fourth quarter.”
Looking beyond the headlines reveals more reason to be optimistic about the recovery. The gross profit margin has remained stable after falling in recent quarters, implying strong price trends both in store and online. Selling costs increased, but the increase was not as severe as shareholders saw earlier in 2020. As a result, Ulta ended the year with strong profitability. Operating profit was $ 224 million, or 10% of sales, from $ 288 million, or 12.5% of sales, a year ago.
Inventory levels have also declined, meaning the retailer is entering the new fiscal year without the heavy burden of slow-moving makeup and skin care products. “We are starting fiscal 2021 with a solid foundation in place and good operational momentum,” said Dillon.
New difficult realities
Still, Ulta’s near-term outlook reflected a cautious reading of the makeup industry. Sales will reach between $ 7.2 billion and $ 7.3 billion in 2021, management said, meaning a full revenue recovery will not occur until at least 2022 (Ulta recorded 7.4 billion dollars in annual revenue in 2019). The rebound in profitability will be just as slow, with the operating margin likely reaching 9% in 2021 from 12% in 2019, before the pandemic hits.
Ulta also plans to open just 40 new stores this year compared to the 86 it launched in the last year leading up to the pandemic. This slower expansion includes the suspension of the channel’s proposed entry into Canada. The cautious launch strategy also promises to limit opportunities for sales growth over the next several years, even as the company adds hundreds of smaller locations within Target stores.
Separately, Ulta announced that Dillon will step down as CEO in June, with Dave Kimbell set to take over. Other changes include a new COO and board transitions.
These executives will step in at a difficult time for Ulta Beauty, which projects a multi-year trajectory towards a full COVID-19 rebound. Longer-term growth prospects are also murky, now that a sharp increase in the store’s footprint is not on the cards until at least 2022.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.