The stock of Ulta Beauty has spent all of the past year trailing the broader market. The pandemic’s impact has been a lift for many retailers, but demand has dropped for Ulta’s skin care and makeup products as social distancing reduced traffic at its salons.
The company has a chance to upgrade that weak narrative when it reports fiscal fourth-quarter earnings in just a few days. Let’s look at what investors might expect to see in that announcement, set for Thursday, March 11.
Sales will drop
Most retailing niches rebounded quickly following the temporary store closures that started a year ago. But the makeup industry has been different. In early December, Ulta announced that comparable-store sales dropped 9% in the third quarter, which ended in early November. Revenue through the first three quarters of 2020 was down more than 20%.
CEO Mary Dillon and her team said the third-quarter results were still better than they expected, thanks to a booming e-commerce segment and popular offerings like curbside pickup. Management still predicted a tough holiday quarter ahead, though, with sales likely falling anywhere from 12% to 14%. “We know this holiday season will be like no other,” Dillon told investors.
Wall Street is expecting a slightly better result this week, with fourth-quarter sales falling about 10% to $2.07 billion.
Checking up on profits
Ulta entered the holiday period in a strong inventory position, which might lay the groundwork for an earnings rebound beginning this quarter. Gross profit margin through the third quarter plunged to 30% of sales from 37% a year earlier, and the pressure pushed net profit down to just barely breakeven.
Yet the earnings outlook is brightening thanks to improving sales trends, reduced costs, and a slower store expansion pace. Ulta declined to issue a profit outlook for the period, but investors are hoping to see earnings land around $2.31 per share compared to $3.89 last year.
ULTA Operating Margin (TTM) data by YCharts. TTM = trailing 12 months.
Ulta could get a lift from higher prices, which would show up in a robust gross profit margin. It will be hard for that success to offset lower customer traffic, though.
Looking out to 2021
The ongoing pandemic might convince management to hold off on issuing its usual fiscal-year outlook, which it withdrew almost exactly a year ago. Still, investors will get some hints at Ulta Beauty’s potential in this report. A second straight quarter of improving growth might imply a big rebound in the fiscal first quarter. Strong margins and a flexible inventory position, meanwhile, should allow earnings to jump in 2021 compared to last year’s depressed result.
The big question is whether there will be any lasting negative impact on Ulta’s makeup business due to increased work-from-home trends. It’s also unclear when most shoppers will feel confident enough to linger in its salons again. That in-person creative experience was a core competitive asset for the company before COVID-19 removed it last year.
The pandemic’s impact isn’t over yet, and so investors might not hear a detailed outlook from Ulta Beauty this week. But the good news is that 2021 is almost sure to look much better than 2020 did.