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ULTA bounces back from poor Q2 performance

AInvestFriday, Dec 6, 2024 11:22 am ET
2min read

Ulta Beauty delivered a strong Q3 performance, exceeding both top- and bottom-line expectations, a notable rebound from a disappointing Q2. EPS came in at $5.14, beating the consensus estimate of $4.53 by $0.61. Revenue rose 1.7% year-over-year to $2.53 billion, also exceeding expectations of $2.5 billion. Comparable sales grew by 0.6%, driven by a 0.5% increase in transactions and a 0.1% rise in average ticket size. These results reflect improved consumer engagement and the initial success of strategic actions aimed at strengthening market position.

Fragrance and skincare categories were standout performers, with high-single-digit and mid-single-digit comparable sales growth, respectively. However, makeup and hair care struggled, posting low single-digit declines due to softness in mass-market makeup and limited product innovation. Merchandise margins were flat year-over-year, indicating effective cost management despite a challenging competitive environment. Ulta's gross margin of 39.7% exceeded estimates of 38.9%, reflecting improved promotional strategies and operational efficiencies.

Ulta highlighted several initiatives that contributed to its turnaround. The expansion of its loyalty program, which now boasts 44.4 million active members (up 5% year-over-year), drove higher engagement. Digital sales also saw robust growth, with app-based transactions accounting for roughly two-thirds of e-commerce sales, a 600-basis-point improvement. Additionally, the rollout of new makeup brands and wellness offerings in Q3 boosted customer interest and positioned Ulta well for the holiday season.

Management expressed cautious optimism for the holidays, citing strong Black Friday and Cyber Monday sales trends. Consequently, Ulta modestly raised its FY25 guidance, projecting EPS of $23.20-$23.75 (up from $22.60-$23.50) and revenue of $11.1-$11.2 billion (slightly up from $11.0-$11.2 billion). Comparable sales guidance was revised to negative 1% to flat, up from negative 2% to flat. The conservative adjustment reflects macroeconomic uncertainties and a shorter holiday season.

Ulta’s store expansion strategy also accelerated, with 26 new locations opened in Q3, compared to 12 in the prior year. Inventory levels increased by 1.9% year-over-year to $2.37 billion, aligning with analyst expectations. While SG&A expenses rose 3.2% year-over-year to $682.3 million, they came in below estimates of $688.4 million, highlighting disciplined cost management.

The market responded positively to Ulta’s results, with shares gapping up 12% following the announcement. Analysts revised price targets upward, with Telsey Advisory Group raising its target to $500 from $450, citing Ulta’s strong store portfolio, omni-channel capabilities, and robust loyalty program as competitive advantages. Other analysts echoed this sentiment, emphasizing the company's ability to navigate near-term challenges while positioning itself for long-term growth.

Ulta’s focus on balancing prestige and mass-market offerings, alongside its digital transformation, positions it well in a resilient beauty category. Despite lingering competitive pressures, stabilization in its prestige market share and improved promotional effectiveness bode well for the future. The company’s strategic investments and operational enhancements provide a solid foundation for continued market share gains.

Overall, Ulta’s Q3 performance demonstrates its ability to adapt to challenging market conditions while maintaining profitability. The company’s cautious yet optimistic outlook for FY25 reflects a prudent approach to managing uncertainty, setting the stage for sustained growth in a competitive industry. Investors appear reassured by the turnaround, as evidenced by strong post-earnings stock price action.

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