Ulta Beauty's 2025 Earnings Calls: Contradictions Emerge in Operating Margins, Promotional Strategies, and Prestige Makeup Performance

The above is the analysis of the conflicting points in this earnings call

Date of Call: August 28, 2025

Financials Results

• Revenue: $2.8B, up 9.3% YOY (vs. $2.6B prior year)
• EPS: $5.78 per diluted share, up 9.1% YOY (includes ~$0.03 tax benefit)
• Gross Margin: 39.2%, up 90 bps YOY (vs. 38.3% prior year)
• Operating Margin: 12.4%, down 50 bps YOY (vs. 12.9% prior year)

Guidance:

• FY25 net sales expected at $12.0B–$12.1B; comps +2.5% to +3.5% (H2 flat to low single digits).
• FY25 operating profit down high single digits; operating margin 11.9%–12.0% (H2 10.7%–10.9%).
• FY25 gross margin to deleverage (store occupancy, supply chain), partially offset by lower shrink.
• FY25 SG&A up 13%–14%; elevated in H2.
• FY25 diluted EPS $23.85–$24.30; tax rate ~24%.
• 63 net new stores in 2025; targeting 50–56 new stores per year over the next 2–3 years.
• Marketplace launches in Q3; management remains cautious on consumer demand.

Business Commentary:

• Sales and Market Share Growth:
• Ulta Beauty's net sales increased by 9.3% to $2.8 billion for the second quarter of fiscal 2025.
• Comp sales growth was 6.7%, with positive comp growth in both channels and all major categories.

• Growth was fueled by strong brand engagement, improved in-store conversion, and a focus on enhancing the guest experience.

• Operational Efficiency Improvements:

• Gross margin increased by 90 basis points to 39.2%, driven by reduced inventory shrink and more effective promotional strategies.
• Operating profit was 12.4% of sales, with a 4.8% increase to $345 million.

• The improvements were attributed to better in-store execution and operational excellence, leading to stronger in-store conversion and guest satisfaction.

• Digital and Personalization Initiatives:

• Ulta Beauty's e-commerce sales increased in the low double-digit range, with half of orders fulfilled by stores.
• Personalized recommendations and features like Split Cart and Replenish and Save contributed to strong customer engagement and measurable results.

• Digital enhancements were part of a strategy to deepen guest connections and drive performance.

• International Expansion and Brand Building:

• Ulta Beauty acquired the U.K. specialty beauty retailer, Space NK, to enhance its international presence.
• The acquisition aligns with Ulta Beauty's strategy to enter new markets and enhance its brand-building capabilities.
• The purchase allows Ulta Beauty to leverage learnings from Space NK while maintaining a focus on its U.S. business and supporting brand partners globally.

Sentiment Analysis:

• Management cited stronger-than-planned sales, 6.7% comps, gross margin +90 bps, and market share gains. EPS rose 9.1% and guidance was raised (sales, EPS). Loyalty members grew 4% to 45.8M; e-commerce grew low double digits. While cautious on H2, they expect continued momentum and called out improved promotional efficiency and shrink reductions across every category and region.

Q&A:

• Question from Dana Lauren Telsey (Telsey Advisory Group): How sustainable is momentum under Ulta Beauty Unleashed, any differences between Q3 and Q4, and pathway for operating margin improvement as shrink falls?
  Response: Momentum should continue but H2 faces tougher compares and macro uncertainty; margins will be pressured near term by deleverage, healthcare, incentive comp, and moderating shrink benefits, with long-term margin growth still a focus.

• Question from Michael Charles Binetti (Evercore ISI): What underpins H2 comp guidance (flat to low single digits) given momentum, and any leverage breakpoints for margin vs Analyst Day targets?
  Response: H2 outlook modestly increased but remains cautious; SG&A ran higher from Space NK transaction costs and incentive comp; long-term algorithm unchanged pending 2026 planning.

• Question from Adrienne Eugenia Yih-Tennant (Barclays): Describe the promotional backdrop and your restraint; update on health and wellness strategy and priorities.
  Response: Promotional impact was lower vs 2Q24 after cutting overlapping offers and optimizing timing; wellness is scaling via curated expansion (150 brands/700 SKUs) with a long-term $1B opportunity.

• Question from Simeon Ari Gutman (Morgan Stanley): Philosophy on margins vs reinvestment as growth reaccelerates?
  Response: Prioritize operating profit dollars with disciplined ROI on investments to sustain growth in a highly competitive category.

• Question from Steven Paul Forbes (Guggenheim Securities): How are cannibalized stores recovering and what ensures recaptured sales stick?
  Response: Competitive expansion is slowing and impacted stores are improving; Ulta will leverage loyalty and personalization to retain/recapture guests, with additional opportunity post-Target exit.

• Question from Olivia Tong Cheang (Raymond James): Break down mass vs prestige performance and outlook for exclusives/newness pipeline.
  Response: Both mass and prestige makeup grew; newness is balanced across categories with a robust pipeline (e.g., Fenty Skin Body), aided by lapping Ulta Beauty Collection exit.

• Question from Susan Kay Anderson (Canaccord Genuity): Rationale for acquiring Space NK vs opening Ulta stores overseas and any productivity differences?
  Response: Space NK enables capital-light entry into the U.K. with a prestige, high-street model run standalone; Ulta pursues multiple international paths (license/JV/acquisition) while keeping the U.S. core priority.

• Question from Christopher Michael Horvers (JPMorgan): What’s driving share gains—less competitive encroachment or Ulta self-help and newness?
  Response: Gains are primarily from stronger execution, broad newness, and more relevant marketing, lifting conversion and NPS across price points.

• Question from Katharine Amanda McShane (Goldman Sachs): Implications of the Target relationship change for standalone real estate strategy?
  Response: New store plan shifts to 50–56 openings annually over 2–3 years due to return-focused discipline amid higher site costs; 63 net new stores planned for 2025.

• Question from Oliver Chen (TD Cowen): How will the curated marketplace integrate with loyalty and balance curation vs growth amid affiliates/TikTok/Amazon?
  Response: Invitation-only marketplace will award loyalty points and offer easy returns; it’s designed to be margin accretive and complementary, while Ulta tests relevant external platforms.

• Question from Mark R. Altschwager (Baird): Can initiatives offset loss of high-flow-through Target royalties after 2026, and what is the flow-through rate?
  Response: Target royalties flow through at ~60%–65%; management expects Ulta Unleashed initiatives to replace lost royalties and keeps long-term targets unchanged.