ULTA Earnings Preview: Can it cut through the industry headwinds?

Ulta Beauty is set to release its earnings after market close on December 5, with a conference call scheduled for 4:30 PM ET. Analysts are expecting Q3 EPS of $4.54, with estimates ranging from $4.13 to $4.99, and revenue is forecasted at $2.50 billion. For the full fiscal year, EPS is estimated at $23.15, and revenue is projected at $11.17 billion. Notably, Ulta reaffirmed its guidance during its Investor Day on October 16, setting expectations for steady performance despite ongoing macroeconomic challenges.

Key guidance metrics reaffirmed at the Investor Day include comparable sales growth and operating margins that suggest cautious optimism despite industry headwinds. However, analysts have expressed concern that consensus estimates for 2025 comps and margins may remain overly optimistic, especially given that an inflection in the beauty category by early 2025 appears unlikely. Competitive pressures, particularly from Sephora's expanded footprint, and challenges associated with the shift toward online shopping, remain critical headwinds for the retailer.

Heading into the Q3 report, several trends warrant close attention. Foot traffic data for the quarter showed a 3% year-over-year increase, providing some reassurance that in-store activity remains healthy. However, Piper analysts highlight that digital engagement appeared weaker, and ticket sizes and transaction counts will need to confirm this strength. Promotional activity, including early Black Friday deals, may have impacted margins, and seasonal hiring trends could add additional pressure. Margins, therefore, are viewed as more vulnerable than top-line performance.

Investor sentiment has been mixed, with Canaccord raising its price target to $476 on optimism about Ulta’s ability to recapture prestige beauty market share from Sephora, while analysts have cited concerns about the beauty category's online migration and retail cannibalization. Adding to the uncertainty, Berkshire Hathaway recently sold most of its Ulta stake, signaling potential caution. In this context, Q3 results will be pivotal in clarifying Ulta’s ability to navigate competitive pressures and sustain its leadership in the beauty sector.

Ulta Beauty's Q2 results were disappointing, reflecting a combination of macroeconomic pressures, operational challenges, and intensified competition. The company reported earnings per share (EPS) of $5.30, falling short of the $5.49 consensus estimate and significantly below the $6.02 reported in the prior year. Revenue increased marginally by 0.9% year-over-year to $2.55 billion, but this also missed the $2.61 billion estimate. Comparable sales declined by 1.2%, marking the company’s first comp decline since Q4 2020, and well below expectations of a 1.32% increase. Gross margins also contracted to 38.3% from 39.3% last year, missing the 38.8% estimate, further highlighting the pressures on profitability.

The company issued another downward revision to its full-year guidance, which weighed heavily on investor sentiment. Ulta now expects FY24 net sales between $11.0 billion and $11.2 billion, down from the prior range of $11.5 billion to $11.6 billion, with comparable sales forecasted to decline 2% to remain flat, versus the prior guidance of a 2%-3% increase. Full-year EPS is projected between $22.60 and $23.50, a sharp drop from the previous outlook of $25.20 to $26.00. Management also lowered operating margin expectations to 12.7%-13.0% from 13.7%-14.0%, reflecting continued headwinds.

Key drivers of the underperformance included normalizing beauty demand after years of exceptional growth, increased competition from players like Sephora expanding within Kohl’s stores, and operational disruptions stemming from an ERP implementation. Promotional strategies, including earlier sales events, failed to drive significant in-store traffic, further dampening results. While the company’s loyalty program grew by 5% year-over-year, this was insufficient to offset broader challenges. Inventory levels also rose by 10% to $2 billion, raising concerns about potential overstocking.

Ulta remains in a strong position within the beauty sector, which analysts view as fundamentally healthy, but the company faces near-term uncertainties. Intensified competition, macroeconomic challenges, and operational execution risks cloud the outlook. While some analysts believe the company's guidance has been sufficiently de-risked, others remain cautious, particularly with the potential for further long-term target resets. The upcoming promotional events, like 21 Days of Beauty, and the relaunch of the Ulta Beauty collection are expected to play a crucial role in determining whether the company can regain momentum in the second half of the fiscal year. However, with shares down significantly post-earnings, Ulta’s path to recovery remains uncertain.