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It took over a year, but Ulta Beauty (NASDAQ: ULTA) is finally back to posting faster sales gains. The spa and beauty products retailer had plenty of good news for investors in its third-quarter earnings report, including that expansion pace increase. There were some parts of the announcement that were less well received by Wall Street, though, such as Ulta's plan to scale back on new store openings over the next few years.
CEO Mary Dillon and her executive team explained the reasoning behind the move in a conference call with analysts while detailing management's broader confidence in the business. Below are a few highlights from that presentation.
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Succeeding where it counts
Ulta Beauty's strong performance in the third quarter 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.
Ulta Beauty's 7.8% sales increase was close to the top end of the guidance that management issued three months ago and also represented the chain's first growth acceleration, quarter to quarter, since late 2017. A few positive trends combined to produce a healthier sales environment, including strong customer traffic and booming demand in the online sales channel.
The more important factor was a rebound in the prestige cosmetics niche, Ulta Beauty's biggest segment. Dillon said that management noticed "encouraging stabilization" in that part of the industry, which had been contracting for over a year. That recovery helped comparable-store sales improve to 8% from 6.5% in the prior quarter.
Expanding the store base
With increased confidence in the next several years of store growth, we narrowed our store target range to 1,500 to 1,700 and will slightly moderate new store openings in the next few years. We've planned to open 80 stores in 2019, 75 stores in 2020, and 70 stores in 2021. Moderation is planned in tandem with a greater focus on portfolio repositioning, as a large number of store leases are coming up for renewal in the next several years.
Ulta Beauty is happy with the economic returns from its latest crop of stores, and it opened 42 new locations in the third quarter to make it easily the biggest quarter of the year for launches. However, with roughly half of its sales growth coming from the online channel right now, which now represents 11% of sales, management is seeing good reasons to shift its expansion strategy toward digital and away from new physical stores.