Ulta Beauty's Q2 2025 Earnings Call: Contradictions in Operating Margins, Unleashed Plan, 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 vs 38.3% last year
• Operating Margin: 12.4%, down 50 bps vs 12.9% last year

Guidance:

• FY25 net sales expected at $12.0–$12.1B.
• FY25 comps +2.5% to +3.5%; H2 comps flat to low single digits.
• FY25 operating profit down high single digits; operating margin 11.9%–12.0%; H2 OM 10.7%–10.9%.
• FY25 gross margin to deleverage (occupancy/supply chain), partially offset by lower shrink.
• FY25 SG&A growth +13% to +14%; H2 SG&A growth elevated.
• FY25 diluted EPS $23.85–$24.30; tax rate ~24%.
• 63 net new stores in 2025; targeting 50–56 new stores annually for next 2–3 years.
• Curated online marketplace launches in Q3.
• First Mexico store opened; first Middle East store later this year.

Business Commentary:

* Strong Revenue Growth: - Ulta Beauty reported net sales of $2.8 billion for Q2 2025, up 9.3% year-over-year. - Growth was driven by a 9.3% increase in comparable sales and a 6.7% increase in comp sales.

• Operational Improvements and Shrink Reduction:
• Ulta Beauty experienced a 12.4% operating profit margin for the quarter, driven by a 90 basis point increase in gross margin.

• This improvement was attributed to reduced inventory shrink and more effective promotional strategies.

• Promotional Strategy and Loyalty Growth:

• The company reported a positive comp sales growth in both channels, with a focus on optimized promotional strategies and marketing efforts.

• This was supported by an expansion in loyalty member growth by 4% year-over-year to a record 45.8 million members.

• International Expansion and Strategic Acquisitions:

• Ulta Beauty reached a major milestone with its entry into the U.K. market through the acquisition of Space NK, which operates 83 U.K. and Ireland stores.

• This expansion is part of Ulta Beauty's strategy to leverage international market opportunities and strengthen its global presence.

• Wellness Segment Growth:

• The wellness segment contributed to Ulta Beauty's growth, with an expanded footprint in 370 stores and new brand launches.
• The company aims to capitalize on the growing wellness market, viewing it as a potential $1 billion segment in the future.

Sentiment Analysis:

• Management reported net sales +9.3% to $2.8B, comps +6.7%, EPS +9.1% to $5.78, gross margin +90 bps to 39.2%, and loyalty members +4% to 45.8M. They raised FY25 outlook (sales $12.0–$12.1B; EPS $23.85–$24.30) and cited ongoing market share gains. While noting H2 caution (flat to low-single-digit comps; operating profit down high single digits; OM 10.7%–10.9% in H2), the tone emphasized strong execution, improved promotional efficiency, and strategic progress (marketplace, international).

Q&A:

• Question from Dana Lauren Telsey (Telsey Advisory Group): How sustainable is momentum under Ulta Beauty Unleashed, differences between Q3/Q4, and path to higher operating margins as shrink improves?
  Response: Momentum should continue but H2 faces tougher compares and macro uncertainty; near-term margins pressured by inflation, investments, incentive comp, and moderating shrink benefit, with a focus on building long-term operating margin.

• Question from Michael Charles Binetti (Evercore ISI): What underpins the flat-to-low-single-digit H2 comp guide despite current momentum, and is there greater leverage potential toward the 12%+ margin target?
  Response: They modestly raised H2 but remain cautious; SG&A was higher on Space NK transaction costs and incentive comp; too early to adjust long-term targets, focusing on execution rather than raising structural leverage assumptions now.

• Question from Adrienne Eugenia Yih-Tennant (Barclays): Describe the promotional backdrop and your approach; update on wellness scale and prioritization.
  Response: Promotional impact was lower YOY due to pruning and retiming; expect rational promo environment; wellness expanded to ~370 stores (+50 more), ~150 brands/700 SKUs, and could reach ~$1B over time with disciplined curation.

• Question from Simeon Ari Gutman (Morgan Stanley): Philosophically, should margins rise or be held to fund reinvestment and top-line momentum?
  Response: They prioritize operating profit dollars and ROI, pacing investments to sustain growth in a highly competitive category while ensuring returns, rather than targeting a fixed margin level.

• Question from Steven Paul Forbes (Guggenheim Securities): Are cannibalized/pressured stores recovering, and how do you ensure recaptured sales are durable?
  Response: Competitive expansion is slowing and impacted stores are improving; expect lower pressures than 2024; leveraging loyalty and personalization to retain/recapture guests, with further recapture opportunity as the Target partnership ends.

• Question from Olivia Tong Cheang (Raymond James): How did mass vs. prestige perform, and what does the newness pipeline look like?
  Response: Both mass and prestige makeup grew; cycling last year’s Ulta Collection sell-down aided mass; newness is balanced across categories with a strong pipeline and exclusives continuing.

• Question from Susan Kay Anderson (Canaccord Genuity): Why acquire Space NK versus opening Ulta stores abroad, and any productivity contrasts?
  Response: Acquiring Space NK offers a capital-light U.K. entry with a strong, prestige, high-street format; it remains standalone, provides learnings, and supports global brand partnerships while keeping the U.S. as top priority.

• Question from Christopher Michael Horvers (JPMorgan): What is driving share gains—fading competitive encroachment or self-help/newness?
  Response: Gains are primarily self-help: better execution, broader newness, improved conversion/NPS, and culturally relevant marketing lifting both mass and prestige.

• Question from Katharine Amanda McShane (Goldman Sachs): How does ending the Target partnership affect standalone real estate strategy?
  Response: Not directly; they’re moderating new store adds to 50–56 annually (63 in 2025) due to cost/availability, prioritizing returns and best locations.

• Question from Oliver Chen (TD Cowen): How will the curated marketplace balance trust/curation with growth and integrate with loyalty amid TikTok/Amazon dynamics?
  Response: Invitation-only curation; members earn points; easy returns via stores/happy returns; expands assortment and margins with low risk; they’ll engage on external platforms where guests are.

• Question from Mark R. Altschwager (Baird): Can initiatives offset the high-flow-through Target royalty loss in 2026?
  Response: Target royalty flow-through ~60–65%; management expects Ulta Unleashed initiatives—marketplace, partnerships, new businesses—to replace lost royalties; long-term targets unchanged.